Tax and the work Christmas party

As the year draws to a close employers and their staff begin to focus on the festive period. If you are planning a Christmas party to reward your staff for their hard work and dedication throughout 2024, you might want to consider the tax position.

Is a work Christmas party tax deductible?

Parties and other social functions can be expensive to organise and run.  The good news is that the event is typically allowable for the business, meaning you may deduct the costs from your business profits before tax is applied.  Unfortunately the entertaining of customers and suppliers is NOT tax allowable.

Mixed events where both staff and non staff attend would need to have associated costs apportioned to determine the tax deductible amounts.

Is a work Christmas party a taxable benefit for the staff attending?

In most cases the event would be tax free for the staff member but only if the event meets the following criteria:

• Your Christmas party must serve the primary function of entertaining your employees.
• It must also be a planned annual event, such as a Christmas party or summer social and it must be open to all employees (this could be separate events if your business has more than one location or could be separated for different departments, as long as all employees can attend one of them).
• The cost must not exceed £150 per head.

What is the £150 threshold?

The total cost of the event must not be greater than £150 per person (including VAT, accommodation, and transport).  This £150 total is for the whole year so you could not host two annual events costing £150 per head. You could, however, host two annual events costing £75 per head as this would not exceed the £150 threshold in total.

The £150 is also an exemption rather than an allowance. This means if your party costs £151 per head, the whole cost of the party will be taxable, not just the £1 per person above the £150 threshold.

Can your staff bring a guest?

Whilst the exemption status depends on the Christmas party being primarily for employees, you could extend the invitation for your staff to bring along their partner or a guest however, the cost of these attendees must be included in the £150 per head limit to avoid being taxable on the staff member.

If the event doesn’t meet the exemption conditions

If the event satisfies the exemption criteria outlined above, then there is no tax or national insurance due for the staff member. If the event does not meet the exemption rules, then it will be a taxable benefit reportable on form P11D, which means the employee pays income tax on the value while the employer pays Class 1A NIC. Alternatively the employer can apply to pay the tax and NIC on the employees’ behalf via a PAYE settlement agreement.

What about VAT?

If your business is registered for VAT, you may be able to reclaim the VAT incurred on the costs of hosting the Christmas party such as food, drinks and entertainment expenses. Learn more about this in our VAT on business, client and staff entertainment blog.

Keep records to keep HMRC happy

HMRC may run a compliance check against your business and you will be asked for records of the costs associated with the event such as invoices and receipts.

You may be subject to penalties and additional tax charges if you incorrectly claim the exemption or exceed the £150 per head limit.