Staff Christmas Party and Gifts: The Tax Rules

A staff Christmas party is normally tax-free for employees if it is an annual event open to all staff and costs £150 or less per head, and small Christmas gifts of £50 or less can be tax-free as trivial benefits. Go over either limit, or give cash, and the cost usually becomes taxable. This guide explains the staff Christmas party and gift tax rules for small employers, with a worked example and a checklist to use before you book.

Key takeaways

• The annual function exemption covers £150 or less per head, including VAT.
• Go over £150 per head and the whole amount is taxable, not just the excess.
• Gifts costing £50 or less can be trivial benefits if they are not cash or a reward.
• Directors of close companies are limited to £300 of trivial benefits a tax year.
• Cash gifts and bonuses are always taxed through payroll.

What is the annual function exemption?

The annual function exemption is a rule that stops a staff party or similar event being treated as a taxable benefit in kind for your employees. Without it, free food, drink and entertainment provided by an employer would count as a benefit to report. GOV.UK sets out the conditions on its page about social functions. The event must:

• be annual, such as a Christmas party or summer barbecue
• be open to all your employees, or all employees at one location
• cost £150 or less per head, worked out as set out below

The £150 can be split across more than one annual event, for example a summer event and a Christmas party, provided the combined cost per head stays within £150. If the combined figure goes over, you can use the exemption for the event or events that fit within the limit, and the rest is taxable.

How to work out the cost per head

1. Add up the total cost of the event, including VAT.
2. Include extras such as transport, taxis home and overnight accommodation.
3. Divide by the total number of people attending, including guests who are not employees.
4. Compare the result with £150. If several annual events are held, add the per-head figures together.

What is a trivial benefit?

A trivial benefit is a small gift to an employee that is tax-free and does not need reporting. GOV.UK's rules on trivial benefits say the benefit must cost £50 or less, must not be cash or a cash voucher, must not be a reward for work or performance, and must not be in the employee's contract. Directors of close companies, which includes most small family and owner-managed companies, can receive no more than £300 of trivial benefits in a tax year. A Christmas hamper, a bottle of wine or a store gift card that cannot be exchanged for cash will often fit.

Party, gifts and bonuses compared

Benefits that do not qualify are usually reported on a P11D or settled by the employer through a PAYE Settlement Agreement, which must normally be agreed with HMRC by 5 July after the end of the tax year. Our guide to P11D and benefits in kind explains the reporting side.

Corporation tax and VAT

For a limited company, the cost of entertaining employees is generally allowable for corporation tax, while the cost of entertaining clients and other non-employees generally is not. If clients attend your staff party, the share of the cost relating to them is usually disallowed. Input VAT on genuine staff entertaining can usually be reclaimed, but VAT on entertaining non-employees usually cannot. The rules have detailed exceptions, so check the current HMRC guidance or ask us before reclaiming. Our guides to allowable expenses for limited companies and VAT on business expenses go into more detail.

Worked example (illustrative example)

Illustrative example only, not a real business. A small bakery company has 12 employees. It books a Christmas dinner for all staff, each of whom may bring a partner, so 24 people attend. The restaurant bill is £2,880 including VAT, and the company pays £360 for taxis home, a total of £3,240. Divided by 24, that is £135 per head. With no other annual events in the tax year, it is within £150, so there is no taxable benefit for the staff.

The company also gives each employee a hamper costing £40, not linked to performance or the employment contract. Each hamper is a trivial benefit. If the company had added a £100 cash bonus for each employee instead, that would be processed through payroll with tax and National Insurance in the normal way.

Had the company also held a summer barbecue costing £30 per head earlier in the same tax year, the combined figure would be £165 per head. It could then exempt one of the two events, normally the one that makes better use of the £150, and the other would be taxable.

Common mistakes

• Treating £150 as an allowance. One pound over the limit makes the whole cost taxable.
• Forgetting VAT and extras. Taxis, hotel rooms and drinks tabs all count towards the per-head figure.
• Inviting only some staff. An event for managers only does not qualify for the exemption.
• Giving cash or cash vouchers as a "gift". These are never trivial benefits.
• Linking gifts to performance. A hamper given as a reward for hitting targets is not trivial.
• Losing the paperwork. Keep the invoice and a guest list to support the per-head calculation.

Checklist before you book

• Is it an annual event, open to all staff or all staff at one location?
• Have you budgeted the total cost including VAT, transport and accommodation?
• Have you counted every attendee, including partners?
• Have you allowed for any other annual events this tax year?
• Are gifts £50 or less, non-cash, and not a reward?
• Are any director gifts within the £300 annual cap?
• Will any client attendance be split out in the accounts?

How we can help

We run payroll for small employers on a fixed monthly fee, from £25 per month per employee, and we can check whether your party and gift plans fit the rules before you spend. See our payroll service, check our pricing, or contact us with your plans for this year.