It’s October, which means one thing in offices, workshops and shop floors across the country, someone’s started a group chat about the Christmas do.
A festive night out is one of the best ways to thank your team for a year of hard work. Get the tax side right and HMRC will help foot part of the bill. Get it wrong and a well-meant party can land you and your staff with a tax bill nobody saw coming.
Here’s what small business owners need to know before booking the venue.
How the £150 exemption works
HMRC lets you spend up to £150 a head, per tax year, on annual staff events without it counting as a taxable benefit. Your team pays no tax on it, you pay no National Insurance on it, and there’s nothing to report.
To qualify, the event needs to:
- be an annual event, like a Christmas party or summer barbecue
- be open to all your employees, or all employees at one site if you have more than one location
- cost no more than £150 per person in total across the tax year
The tax year runs from 6 April to 5 April. So this year’s Christmas party shares its £150 pot with anything you’ve already put on since April.
As a business expense, staff entertainment is also deductible for tax purposes. That means the party reduces your profits and your tax bill too.
Where the £150 catches people out
The exemption sounds simple. In practice, it’s easy to tip over the limit without realising.
It’s a limit, not an allowance. Spend £151 a head and the whole amount becomes taxable, not just the extra £1.
Everything counts. The £150 includes VAT, food, drinks, venue hire, the DJ, taxis home and any hotel rooms you cover. A generous bar tab can blow the budget on its own.
Every event shares one pot. Put on a £60 summer barbecue and a £100 Christmas party and you’ve spent £160 a head. You can still exempt the Christmas party, but the barbecue becomes taxable.
Guests add up. The cost per head is worked out across everyone who attends, partners included. If you go over, each employee is taxed on their own share plus their guest’s.
No-shows push the cost up. The cost per head figure is based on who turns up, not who said yes. If you’ve paid for 30 and only 24 come, the cost per head jumps by 25%.
It must be open to everyone. A directors’ dinner or a managers-only night out doesn’t qualify, however modest the bill.
Cash in lieu doesn’t count. Paying staff who can’t make it the equivalent in cash or vouchers is taxable through payroll.
A quick example
You book a party for 20 staff, each bringing a partner. The venue and food come to £5,200, plus £400 for drinks and £800 for taxis, all including VAT.
That’s £6,400 across 40 people, or £160 a head. Because it’s over £150, every employee now has a taxable benefit of £320 for themselves and their guest. Trim £400 off the bill and the whole thing is tax-free.
What happens if you go over
If your party doesn’t qualify, the cost becomes a benefit in kind. That means it has to be reported to HMRC and someone has to pay tax on it.
You’ve got 2 options.
- Report it as a benefit. Your staff pay income tax on their share of the cost and you pay employer National Insurance (Class 1A) at 15%. HMRC sets out what to report and pay. It works, but nobody enjoys finding out their Christmas party has shrunk their pay packet.
- Pay the tax for them with a PAYE Settlement Agreement (PSA). You agree with HMRC to cover the tax and National Insurance yourself, so your team never sees a bill. For this year’s party, you’d need the PSA in place by 5 July 2027 and the tax paid by 22 October 2027 (HMRC deadlines).
A PSA is the kinder option, but it costs more than you might expect. Because you’re paying your employees’ tax for them, HMRC treats that tax as a benefit too and grosses it up. You then pay Class 1B National Insurance at 15% on the total.
Take the example above. For a basic rate taxpayer with a £320 benefit, the PSA works out at roughly £140 per employee. Across 20 staff, that’s about £2,800 on top of the party itself, all for being £10 a head over the line.
Other festive costs to think about
Gifts
A small present like a bottle of wine, a hamper or a turkey can be tax-free under the trivial benefits rules. Each gift has to cost £50 or less, can’t be cash or a cash voucher, and can’t be a reward for work. Directors of small limited companies are capped at £300 of trivial benefits a year.
Christmas bonuses
Cash bonuses are classed as pay, so they go through payroll with tax and National Insurance as normal. Tell your payroll team early so December’s figures are right.
VAT
If you’re VAT registered, you can usually reclaim the VAT on a staff party. If partners or clients come along, you can only reclaim the VAT on the employees’ share. HMRC explains this in its business entertainment guidance, and our VAT team can help you get the split right.
Inviting clients
Client entertaining isn’t tax-deductible. If customers or suppliers join your party, their share of the cost can’t be set against your profits.
Sole traders and partners
The £150 exemption is for employees. If you work for yourself, it doesn’t cover your own spending, so check with us before putting your own night out through the books.
Directors-only companies
If you and a fellow director are the only employees, the exemption can still apply, as long as the event’s open to everyone on the payroll.
Your Christmas party checklist
- Add up what you’ve already spent on staff events since 6 April
- Set a budget that stays under £150 a head, including VAT, drinks, transport and guests
- Invite every employee, or everyone at that site
- Keep receipts and a note of who attended
- Plan gifts under £50 each if you’re giving them
- Let payroll know about any bonuses before December’s run
If the numbers are looking tight or you’re not sure whether your plans qualify, get in touch with our team. Our payroll team will help you work out the cost per head, keep the party tax-free where we can, and sort out a PSA if you need one. That leaves you free to enjoy the night.
