Staff Christmas party tax: the £150 annual event exemption

A staff Christmas party costs your employees nothing in tax if it is an annual event, open to all your staff, and costs £150 or less per person. That £150 includes VAT, transport and any hotel rooms you pay for. Go over the limit and the whole cost per head becomes a taxable benefit.

What are the conditions for the £150 exemption?

The exemption applies when a party or social function meets all three tests set out on GOV.UK. It must:

• be annual, such as a Christmas party or summer barbecue
• be open to all your employees, or to all employees at one location if you have several sites
• cost £150 or less per person

The rule comes from section 264 of the Income Tax (Earnings and Pensions) Act 2003. A qualifying event needs no reporting to HMRC, and no tax or National Insurance arises on it.

A one-off event, such as a 25th anniversary party, does not qualify.

How do you work out the cost per head?

You divide the total cost of the event by the number of people who attend. HMRC’s EIM21690 says the total includes:

1. The venue, food, drink and entertainment.
2. VAT on all of those costs, even if you reclaim it.
3. Transport to and from the event, if you provide it.
4. Overnight accommodation, if you provide it so staff can attend.

Count everyone who comes, including partners and other guests who are not employees. A party costing £9,000 with 60 guests works out at £150 a head and is exempt. The same party with 59 guests is £152.54 a head and is not.

What happens if you go over £150?

The £150 is a limit, not an allowance. HMRC’s manual says it “is not an allowance to be set against an amount that exceeds that figure”. If the cost per head is £160, each employee has a £160 taxable benefit, not £10.

The benefit also covers any family or household guests the employee brings. An employee who brings a partner to a £160 a head party has a £320 benefit.

Can you hold more than one tax-free event a year?

Yes, if the combined cost per head of all annual events stays at £150 or less. If the total goes over, the events that make best use of the £150 are exempt and the others are taxable. You do not have to track who attended each event.

HMRC’s EIM21691 gives this example of two dinner dances open to all staff.

Exempting the £100 event uses more of the limit, so staff who went to both have an £80 benefit.

Which applies to you?

• If the party is for directors only: it is not exempt. HMRC’s example is a £75 a head directors’ party that is fully taxable.
• If each department has its own party: it can qualify, as long as every employee can attend one of them.
• If you have several offices: a party open to all staff at one location qualifies.
• If the party is online: a virtual party qualifies. HMRC accepts a virtual event with £100 food and drink hampers.
• If staff give up salary for it: you must report the value under salary sacrifice rules.
• If you also give staff a gift: a separate small gift can fall under the £50 trivial benefits rule.

How do you report a party that is not exempt?

GOV.UK says you must report the cost on each employee’s form P11D and pay Class 1A National Insurance on the full cost. See our guide to benefits in kind and the P11D.

Many employers instead settle the tax for staff through a PAYE Settlement Agreement. GOV.UK lists staff entertainment that is not exempt as an item a PSA can cover. You must agree a PSA by 5 July after the tax year and pay by 22 October (19 October by post). The employer pays the tax and Class 1B National Insurance, so staff see no charge.

Is the party deductible for the business?

Yes. Staff entertainment is an exception to the ban on deducting entertainment costs, so a genuine staff party is an allowable expense for Corporation Tax or for a sole trader with employees. The cost of entertaining clients at the same event is not deductible. Our guide to client entertainment tax explains the split.

VAT is different again. You can usually reclaim VAT on the staff share but not on guests. See VAT on staff parties and client entertainment.

Has the £150 limit changed for 2026/27?

No. The limit has been £150 since 6 April 2003, when it rose from £75. HMRC’s manual, updated on 3 November 2026, still gives £150. On 15 September 2026 the Association of Taxation Technicians (ATT) asked the government to raise it to at least £280. We found no change in the Budget 2026 document of 28 October 2026.

What to do now

1. Get a quote that includes VAT, transport and rooms.
2. Divide by the expected number of guests, not just staff.
3. Add any summer event already held this tax year.
4. Keep the invoice and guest list with your payroll records.
5. If you will go over, decide on a PSA before 5 July 2027.

Frequently asked questions

Is a staff Christmas party a taxable benefit?

Not if it is annual, open to all employees and costs £150 or less per head including VAT. Otherwise each employee has a taxable benefit equal to the full cost per head.

Does the £150 include VAT?

Yes. The £150 includes VAT, plus any transport and overnight accommodation you provide for the event.

What if the party costs £160 a head?

The whole £160 is taxable for each attendee, not just the £10 over. You report it on form P11D or pay the tax through a PAYE Settlement Agreement.

Can a virtual Christmas party be tax-free?

Yes. HMRC accepts virtual events, including one with food and drink hampers costing £100 a head, if the other conditions are met.