The annual functions exemption for staff parties

An annual staff party or similar annual event is free of tax and National Insurance if it is open to all employees (or all employees at one location) and the total cost per head of all such events in the tax year is no more than £150, including VAT. The £150 is an exemption, not an allowance: if an event pushes the cost over the limit, the full cost of that event is taxable, not just the excess.

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Which events qualify for the exemption?

The exemption is in section 264 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). HMRC’s Employment Income Manual at EIM21690 says it applies to an annual party, such as a Christmas party, or a similar annual function, such as a summer barbecue, which is:

available to employees generally, or
where the employer has more than one location, available to employees generally at one location.

Three points come up often.

It must be annual. HMRC reads annual as something that happens once a year on a recurring basis. A one off event, such as a party to celebrate a 25th anniversary, cannot qualify, however modest the cost.
It must be open to staff generally. In HMRC’s example at EIM21691, a Christmas party for directors only fails because it is not open to staff generally, so the full cost is taxable on the directors who attend. Separate parties for different departments are fine, as long as every employee can attend one of them.
Virtual events count. An annual online party can qualify, and HMRC’s example includes a food and drink hamper sent to each attendee as part of the event cost.

How is the cost per head worked out?

EIM21690 sets out the method. Take the total cost of the event, including VAT and any transport or overnight accommodation provided so that employees can attend. Divide it by the total number of people who attend, including partners, guests and other non employees. The result is the cost per head.

Each employee is then treated as receiving the cost per head for themselves and for any member of their family or household who attends as their guest. That is why bringing a partner effectively doubles the amount attributed to the employee if the event turns out to be taxable.

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What if there is more than one annual event?

If the employer holds two or more qualifying annual events, the £150 applies to their combined cost per head. HMRC does not expect employers to track attendance employee by employee. Instead, work out the cost per head of each event and add them together. If the total goes over £150, the exemption covers whichever events make best use of the £150, and the rest are taxable (EIM21690).

HMRC’s example at EIM21691 has two dinner dances costing £100 and £80 per head. Together they come to £180, so both cannot be exempt. Exempting the £100 event is more beneficial, so:

employees who attended both are taxed on £80
employees who attended only the first are taxed on nothing
employees who attended only the second are taxed on £80

If either event had cost more than £150 per head on its own, it could never be exempt.

What happens when the limit is exceeded?

Where an event falls outside the exemption, each attending employee is taxed on the full cost per head for themselves and their guests, not on the amount above £150. The employer then has two options:

report the cost on each employee’s form P11D by 6 July after the tax year and pay Class 1A National Insurance on the full cost by 22 July, or
include it in a PAYE Settlement Agreement and pay the tax and National Insurance on employees’ behalf.

A PAYE Settlement Agreement means the employer pays the tax and employees are not taxed personally on the event. GOV.UK lists staff entertainment that is not exempt as an example of an impracticable benefit that can go into an agreement. The application deadline is 5 July after the first tax year it covers, and the tax and National Insurance are due by 22 October (19 October by post). The Class 1A rate for 2026 to 2027 is 15%.

How does it work in a real year?

Illustration only. A business with 40 employees holds two events in 2026 to 2027, both open to all staff.

Event	Total cost including VAT	Attendees	Cost per head
Christmas party	£6,000	50 (40 staff, 10 partners)	£120
Summer barbecue	£2,250	50	£45

The combined cost per head is £165, which is over £150. The Christmas party uses more of the £150, so it is exempt and the barbecue is taxable. An employee who came to the barbecue alone has a £45 benefit; one who brought a partner has £90. The employer reports these or settles them through a PAYE Settlement Agreement.

Had the Christmas party cost £160 per head instead, it could not be exempt at all. Every attendee would be taxed on £160 for themselves and each guest, while the £45 barbecue would then be exempt on its own.

Is the cost deductible for the business?

Staff entertaining is treated differently from client entertaining. HMRC’s Business Income Manual at BIM45034 explains that the exception for entertaining employees does not apply where it is incidental to entertaining customers or others. The test is whether the employer would have paid for the event if no guests were present. Applying that test, a staff party that partners also attend would normally have gone ahead anyway, whereas an event built around clients that some staff also attend would not. For the business side of hospitality, see business entertainment and client gifts.

What are the common mistakes?

treating £150 as an allowance and taxing only the excess
leaving VAT, taxis or hotel rooms out of the total cost
assuming a one off celebration counts because it is the only event that year
forgetting the summer event when the Christmas party is close to the limit
running a separate senior team or directors’ dinner and treating it as exempt
offering events through salary sacrifice: the exemption does not apply and the salary given up is taxable (480 Appendix 12)

Small gifts outside a party, such as a seasonal hamper for each employee, are considered under the separate trivial benefits exemption.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.