Christmas is a brilliant time to bring your team together — whether that’s over a festive dinner, a party, or even something a bit different like wreath-making and cocktails. But before you start booking venues and choosing menus, it’s worth taking a moment to think about the tax and National Insurance implications.
HMRC do offer a helpful tax exemption for annual staff events, but there are a few conditions you’ll need to meet. Getting the planning right now will help you avoid unexpected tax bills for your employees later.
What Counts as an Exempt Christmas Party?
To qualify for HMRC’s annual event exemption, your party or function must tick two boxes:
- It must be an annual event – something held every year, such as your Christmas party.
- It must be available to all employees, or at least everyone at a particular workplace.
If you only hold one annual event during the tax year, the total cost per head must not exceed £150. If you host multiple annual events, the combined cost per head for all events must stay within that £150 limit.
To work out the cost per head, you simply divide the total cost of the event (including any transport provided) by the total number of attendees — employees and guests.
Common Pitfalls to Watch Out For
- One-off events don’t qualify
The exemption only applies to events you hold every year. So if you decide to run a special one-off celebration, even if it costs less than £150 per head and everyone is invited, it won’t fall within the exemption.
- The event must be open to everyone
You can run events for employees by location or department, and these will still qualify. However, an exclusive event for senior leaders wouldn’t meet HMRC’s criteria.
- VAT and guests must be included
VAT forms part of the total cost per head — even if you later reclaim it.
Remember to include guests too when doing the calculation.
And here’s the important part: if the cost per head goes over £150, the whole amount becomes taxable — not just the excess.
For example, if an employee brings a guest and the cost per head is £160, the employee is taxed on the full £320 (£160 x 2).
- Choosing the best way to use the exemption
If you run more than one annual event and the combined cost exceeds £150 per head, you can choose which events to cover under the exemption.
It’s worth thinking strategically here. For example, if you have:
- an event costing £100 per head attended only by employees, and
- another costing £80 per head where employees bring partners,
it’s usually better to exempt the £80 event. Exempting the £100 event would leave the £80 event taxable at £160 per couple, which is often less favourable.
Should You Consider a PAYE Settlement Agreement (PSA)?
If you do end up with a taxable benefit — say the event isn’t annual or the cost limit is exceeded — employees will face a benefit-in-kind tax charge, and you’ll also pay Class 1A National Insurance.
To keep the festive goodwill flowing, many employers choose to cover this on behalf of their team through a PAYE Settlement Agreement (PSA). This means you handle the tax and NI rather than passing the cost on to employees.
It’s a simple way to ensure the Christmas spirit isn’t dampened by a surprise tax bill.
Need Help Planning a Tax-Efficient Christmas Party?
We’re here to help you make the most of the exemptions available — and avoid any nasty surprises from HMRC.
If you’d like advice on your Christmas party plans, PSAs, or any other staff benefits, get in touch with Jon or the team at Jon Davies Accountants. We’ll make sure your festive celebrations stay tax-efficient and stress-free.
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