Tax Treatment of Christmas Parties
Chrissy Leach • 25 November 2024
As the festive season approaches, many businesses plan Christmas parties to reward employees and foster team spirit. While these events are a great way to celebrate the year, it's essential to understand the tax implications to ensure your generosity doesn’t result in unexpected costs, for you or your employees.
The good news is that HMRC provides a tax exemption for annual staff events like Christmas parties. To qualify as tax-free:
- All employees must be invited
- Total cost must not exceed £150 per employee (including VAT), per tax year
- The event must be held annually, such as a Christmas or summer party, rather than one-off occasions
The exemption applies whether the company is a small startup or a larger limited company, as long as these conditions are met. However, if you’re self-employed
then this exemption doesn’t apply, even if you have paid employees.
Guests
You can invite guests to your Christmas party, but be careful not to invite clients, suppliers or referrers as it may end up as disallowable entertaining. It’s probably best for the invitees to be your employees and a plus one.
Don’t get caught out by the £150 per head limit
Firstly, it’s an exemption, not an allowance. This means that if your party is £151 per head, it doesn’t qualify. You can’t claim £150 as exempt and £1 as taxable.
It’s also an annual limit per tax year so if you have multiple parties, they must not exceed £150 per head in total.
The cost per head is calculated as follows:
- Add up the total event costs - this includes venue hire, food, drinks, transport, and any other associated expenses, plus VAT.
- Divide by the number of attendees - include all guests in the calculation, such as employees and their partners if invited.
VAT treatment
If your company is VAT registered, you should be able to reclaim VAT on the Christmas party costs. However, if the party is only for directors as there are no other employees, the VAT will not be allowable. Where guests are invited, the costs must be apportioned so that only the employee element is claimed.
Exceeding the limit
If the cost per head exceeds £150, the entire amount becomes a taxable benefit for employees and the company will need to pay additional national insurance contributions. Alternatively, the company can settle the tax liability on behalf of employees using a PAYE Settlement Agreement (PSA).
Christmas gifts
If you’re also planning to give gifts to your employees, consider the trivial benefits exemption:
- Gifts must cost no more than £50 per employee.
- They cannot be cash or cash vouchers.
- Gifts must not be a contractual entitlement or a reward for performance.
You can read more about this in our previous blog here.
Conclusion
Christmas parties are a fantastic way to boost morale and celebrate your team’s hard work. By understanding the tax rules and keeping within the limits, you can ensure your festive celebrations are both enjoyable and tax efficient.
If you need further advice on organising tax-efficient staff events or understanding employer obligations, feel free to reach out. We’re here to help your business make the most of the festive season!
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