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There is no Christmas party tax to pay if your staff party costs £150 or less per head, including VAT, and is annual and open to all your employees. The exemption covers income tax and National Insurance, so nothing needs reporting to HMRC. If you go over £150 per head, the whole cost becomes a taxable benefit, not just the excess.
This guide explains how the Christmas party tax rules work for 2026/27, how to work out the cost per head, when you can reclaim the VAT, and how gifts to staff and clients are treated. It ends with a worked example for a Bolton business planning its December party.
Christmas party tax: how the £150 exemption works
There is no single Christmas party tax. Instead, HMRC’s annual function exemption applies when a party or social event meets all three conditions:
- It is annual. A Christmas party, summer barbecue or yearly dinner dance qualifies. A one-off event to celebrate a big contract does not.
- It is open to all your employees. If you have more than one site, an event open to all staff at one location still counts. Separate department parties are also fine, as long as every employee can attend one of them.
- It costs £150 or less per head. The figure includes VAT.
Online or virtual events count too, so a virtual party with a hamper delivered to each employee can qualify if it meets the conditions.
A party for directors only fails the “open to all” test. In that case, the full cost is a taxable benefit for each director who attends.
How to work out the cost per head for Christmas party tax
The cost per head is the total cost of the event divided by everyone who attends, not just employees. Include:
- Food, drink and entertainment.
- Venue hire.
- Transport home, such as taxis, if you pay for them.
- Overnight hotel rooms provided so staff can attend.
- VAT on all of the above, even if you reclaim it.
Partners and other guests count in the number of attendees, which helps bring the average down. However, an employee who brings a guest is taxed on the cost for both if the event is not exempt.
Christmas party tax rules if you hold more than one event
The £150 is an annual limit per head, not per event. If you hold a summer barbecue and a Christmas party, add the cost per head of both.
| Events in the tax year | Cost per head | Result |
|---|---|---|
| Christmas party only | £120 | Exempt |
| Christmas party only | £150 | Exempt |
| Christmas party only | £155 | Christmas party tax on the full £155 per attendee |
| Barbecue £60 + Christmas party £85 | £145 combined | Both exempt |
| Barbecue £70 + Christmas party £100 | £170 combined | One event exempt, the other taxable |
Where two events go over £150 together, HMRC lets you apply the exemption to whichever event uses the £150 best. In the last row, the £100 Christmas party would be exempt and the £70 barbecue taxable. To avoid an unexpected Christmas party tax charge, plan your events early in the tax year, which runs from 6 April to 5 April, so the total stays inside the limit.
Christmas party tax if you go over the £150 limit
The £150 is an exemption, not an allowance. If one event costs £151 per head and is not covered, the whole £151 is a benefit in kind for each employee who attends, plus the cost for any guest they bring.
You then need to:
- Report the benefit on each employee’s P11D, or include it in a PAYE Settlement Agreement (PSA) so the business pays the tax instead of the staff.
- Pay Class 1A National Insurance at 15% on the value of the benefit.
Most employers use a PSA, because sending staff a Christmas party tax bill for the Christmas party is not good for morale. Our guide to benefits in kind and our glossary entry on the P11D explain how reporting works.
The cost of a staff party is normally an allowable deduction for Corporation Tax or income tax, whether or not it is exempt for the employees, because staff entertaining is not caught by the business entertainment rules.
Can you reclaim VAT on a Christmas party?
Yes, if you are VAT registered and the party is for your employees. VAT is separate from Christmas party tax on employees, so an event can be exempt for staff and still give you a VAT reclaim. HMRC treats VAT on staff entertainment as input tax that is not blocked.
| Who attends | Can you reclaim the VAT? |
|---|---|
| Employees only (directors can attend alongside staff) | Yes, in full |
| Employees plus partners, clients or other guests | Only the share that relates to employees |
| Directors or partners only | No |
| Clients and business contacts only | No, blocked as business entertainment |
Non-employees for VAT include former staff, pensioners, job applicants and shareholders who do not work for the business. See our VAT returns service if you need help with the apportionment.
Worked example: a Bolton engineering firm’s Christmas party
Rivington Precision Ltd, an engineering firm in Bolton with 20 employees, books a Christmas meal and disco at a local hotel. Eight staff bring partners, so 28 people attend. The bill, including taxis home, comes to £4,200 including £700 of VAT.
| Figure | |
|---|---|
| Total cost including VAT | £4,200 |
| Number of attendees | 28 |
| Cost per head | £150 |
| Christmas party tax due | None, the event is exempt |
| VAT reclaimable (20 of 28 attendees) | £500 |
The cost per head is exactly £150, so the event is exempt and nothing goes on the P11Ds. Because 8 of the 28 guests are not employees, the firm reclaims 20/28 of the £700 VAT, which is £500.
Now suppose the director adds a free bar and the bill rises to £4,480. The cost per head becomes £160. Every attendee’s £160 is now a taxable benefit, so the 20 employees are taxed on £4,480 between them (an employee who brought a partner is taxed on £320). The firm would pay Class 1A National Insurance of £672 (15% of £4,480), plus the tax if it settles through a PSA. That extra £280 on the bar costs far more than £280.
Christmas gifts for staff: the £50 trivial benefits rule
Staff gifts sit outside the Christmas party tax rules. Gifts to employees, such as a bottle of wine, a hamper or a voucher for a shop, can be tax-free as a trivial benefit if:
- It costs £50 or less per employee.
- It is not cash or a cash voucher.
- It is not a reward for work or performance.
- It is not part of the employee’s contract.
If the gift costs £51, the full amount is taxable. Directors of close companies, generally those run by five or fewer shareholders, are limited to £300 of trivial benefits in a tax year. Hampers handed out at the party are judged separately from the £150 party exemption.
Gifts to clients and customers
Client gifts follow different rules:
- Corporation Tax or income tax: gifts to clients are generally not deductible, unless the gift carries a conspicuous advert for your business, costs no more than £50 per recipient in the year, and is not food, drink, tobacco or a voucher. A branded diary or pen qualifies; a bottle of wine with your logo on the wrapping does not.
- VAT: you can reclaim input VAT on business gifts and do not need to account for output VAT, provided gifts to the same person cost no more than £50 excluding VAT in a 12-month period.
- Client entertaining: taking a client to a Christmas lunch is business entertainment. The cost is not deductible and the VAT cannot be reclaimed.
Frequently asked questions
Is there Christmas party tax to pay in 2026?
No Christmas party tax is due as long as the party is annual, open to all employees and costs £150 or less per head including VAT. If it costs more, the whole cost per head is a taxable benefit.
Does the £150 include VAT?
Yes. The £150 limit includes VAT, even if your business reclaims that VAT on its VAT return.
Is the £150 per employee or per person attending?
It is per person attending. You divide the total cost by everyone who attends, including partners and other guests.
Can a sole trader claim their own Christmas party?
A sole trader cannot claim the cost of entertaining themselves, but a party for their employees is allowable. If the only attendees are the owner and friends, it is not a business expense.
Does a virtual Christmas party count for the exemption?
Yes. Online or virtual annual events qualify in the same way, as long as they are open to all employees. HMRC’s own example treats a virtual party with a £100 food and drink hamper per head as exempt.
Plan a tax-free Christmas party
A little planning means no Christmas party tax for your team, keeps staff gifts tax-free and maximises the VAT you can reclaim. Cangaf’s ACCA-qualified team in Bolton helps employers with payroll, benefits reporting and PSAs. Get a fixed-fee quote for your business.
Official guidance: Expenses and benefits: social functions and parties, HMRC Employment Income Manual EIM21690, Business entertainment and VAT (Notice 700/65) and Expenses and benefits: trivial benefits.
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