Staff Christmas Party Tax: The £150 Exemption

A staff Christmas party is free of tax and National Insurance for the people who attend if it is an annual event, open to all your employees (or all employees at one location), and costs £150 or less per head including VAT. If the cost per head goes over £150, the whole cost per head becomes a taxable benefit, not just the excess, although the employer can pay that tax itself through a PAYE Settlement Agreement.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

What conditions must a Christmas party meet to be tax free?

The relief is the annual function exemption in section 264 of the Income Tax (Earnings and Pensions) Act 2003. HMRC gives a Christmas party as the standard example, and the exemption also covers online or virtual parties. The £150 figure has applied since 6 April 2003; before that date it was £75 per head.

It must be annual. HMRC says a one off event, such as a 25th anniversary party, cannot be an annual function.
It must be open to staff generally. All employees, or all employees at one location where you have more than one site, must be able to attend.
It must cost £150 or less per head across all qualifying events in the tax year, worked out as explained below.
It must not be provided through salary sacrifice. gov.uk says parties provided as part of a salary sacrifice arrangement have to be reported.

Our page on the annual functions exemption covers other functions; this page deals with Christmas.

Point	Position for 2026 to 2027
Exemption limit	£150 per head in total for the tax year, including VAT
Who must be able to attend	All employees, or all employees at one location
Cost per head	Total cost including VAT, transport and accommodation, divided by everyone who attends
Over the limit	Full cost per head is taxable and reported on form P11D
Class 1A rate on benefits	15%
PSA deadlines	Apply by 5 July after the tax year; pay by 22 October (19 October by post)
VAT on a staff only party	Recoverable in full as input tax

Who has to be invited for the exemption to apply?

gov.uk says separate parties for different locations or departments are allowed, as long as all of your employees can attend one of them. EIM21690 adds that where staff at one site are split into sections, each section can have its own party, provided a party is available generally to all staff at that site.

The common trap is the directors’ dinner. In HMRC’s own example at EIM21691, a company holds a Christmas party for all its staff at an average of £50 per head and a separate Christmas party for its directors at £75 per head. The directors’ event is not open to staff other than directors, so the exemption does not apply to it and the full benefit is taxable on each director who attends.

Run an accountancy or bookkeeping practice? Solar Protect runs fee protection schemes for practices, so the cost of dealing with an HMRC enquiry into a client is covered rather than written off.

See how our accountant schemes work or call 01795 841 310.

How do you work out the cost per head?

HMRC’s method at EIM21690 has two steps. First, take the total cost of the function, including VAT and the cost of any transport or overnight accommodation you provide so that people can attend. Second, divide that total by the number of people who attend, including people who are not employees, such as partners and other guests.

Late cancellations push the figure up. A party budgeted at £140 per head for 50 people goes over £150 per head if only 45 attend and the venue still bills for 50.

What if you hold more than one staff event in the tax year?

The £150 is a single figure for the whole tax year, not £150 per event. gov.uk says that as long as the combined cost of the events is no more than £150 per head, they are all exempt. If the combined cost per head is more than £150, EIM21690 says the functions that make best use of the £150 are exempt and the others are taxable. HMRC also says employers do not need to keep a cumulative record of which employees attended which event.

Illustration only. Hollow Lane Ltd holds a summer barbecue costing £20 per head and a Christmas dinner at a hotel. The Christmas bill is £5,400 including VAT, plus £600 for a coach, and 40 people attend: 30 staff and 10 partners. The Christmas cost per head is £6,000 divided by 40, which is £150. Together the two events come to £170 per head, so both cannot be exempt. Exempting the Christmas dinner uses the full £150, so that is the better choice. Each employee who went to the barbecue then has a £20 taxable benefit, and nobody is taxed on the Christmas dinner. Had the coach cost £800, the figure would have been £155 and the whole £155 would have been taxable.

What happens if the party costs more than £150 per head?

HMRC is clear that the £150 is an exemption, not an allowance. If a function falls outside the exemption, each employee and director who attends is taxed on the full cost per head, not just the amount above £150, and that includes the cost for any family or household members who attend as their guests.

For events that are not exempt, gov.uk says you must report each employee’s benefit on form P11D and pay Class 1A National Insurance on the full cost of the event. The Class 1A rate on expenses and benefits for 2026 to 2027 is 15%. Our pages on Class 1A National Insurance and P11D forms explain the reporting.

Can the employer pay the tax through a PAYE Settlement Agreement?

A PAYE Settlement Agreement (PSA) lets you make one annual payment to cover all the tax and National Insurance on minor, irregular or impracticable expenses and benefits. gov.uk lists staff entertainment as an example of a minor item, and says staff entertainment that is not exempt from tax or National Insurance can count as impracticable. Items covered by a PSA do not go on P11D forms, and you pay Class 1B National Insurance through the PSA instead of Class 1A. The Class 1B rate for 2026 to 2027 is 15%.

The deadline to apply for a PSA is 5 July following the first tax year it applies to. The tax and National Insurance must be paid by 22 October after the tax year, or 19 October if you pay by post. You tell HMRC what you owe each year; if you do not, gov.uk says HMRC will calculate the amount and you will be charged more. See our PAYE Settlement Agreements page.

Can you reclaim VAT on a staff Christmas party?

Yes, for the staff share. VAT Notice 700/65 says VAT on staff parties, team building exercises and staff outings is input tax, and HMRC’s VAT Input Tax manual at VIT43600 says it can be recovered in full, because an employer provides staff entertainment for business purposes such as staff morale.

Guests change the answer. You can only recover as input tax the VAT incurred on entertaining your employees; the part relating to anyone else is blocked under the business entertainment rules. HMRC’s example is that if roughly equal numbers of employees and guests attend, only 50% of the input tax can be recovered. If an event is provided only for directors or partners, the VAT is not input tax at all, but where directors attend a staff party alongside employees HMRC accepts the VAT is input tax and normally sees no need to apportion. For client hospitality, see VAT on business entertainment.

Is the party an allowable expense for Corporation Tax or Income Tax?

Usually yes. Business entertainment is generally disallowed, but section 46 of the Income Tax (Trading and Other Income) Act 2005 and section 1299 of the Corporation Tax Act 2009 make an exception for entertaining employees. HMRC’s Business Income Manual at BIM45033 says that where an employer provides a staff Christmas party, the legislation does not disallow the cost, although the spending must still be for the purposes of the trade. Staff entertaining that is merely incidental to entertaining customers does not qualify. Client hospitality is covered on our business entertainment and client gifts page, and presents for staff on our Christmas gifts for staff and clients page.

Frequently asked questions

Does a virtual Christmas party qualify?

Yes. gov.uk says the exemption also covers online or virtual parties. In an HMRC example at EIM21691, every employee is invited to an online event and sent a hamper of food and drink to enjoy during it; the cost is £100 per head, so the exemption applies.

Do partners and guests count towards the £150?

Their cost is included in the total and they are counted when you divide it, so a guest at the same cost per head does not change the figure. If the event goes over £150 per head, the employee is taxed on the cost for their family or household guests as well as their own.

Is a party just for the directors covered?

Not where other employees are left out. HMRC’s example of a separate directors’ Christmas party at £75 per head is fully taxable on each director, and the VAT on a directors only event is not input tax.

Could HMRC look at our Christmas party costs?

It can, so keep the invoices, the attendance numbers and your cost per head calculation. HMRC can check payroll and benefits records, and the accountant’s fees for dealing with a check can be insured through tax investigation insurance.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Sources

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