If you employ staff, now is a great time to plan your Christmas thank-you.
Whether it’s a festive meal or a small gift, HMRC lets you treat your team without creating a tax bill, as long as you follow a few simple rules.
This guide covers staff Christmas party tax, tax-free gifts, what happens if something doesn’t qualify, and the VAT and corporation tax position.
Staff Christmas party tax: the £150 per head exemption
HMRC lets employers hold an annual party or similar annual event, such as a Christmas party or summer barbecue, without reporting anything or paying tax or National Insurance on it, provided certain conditions are met (GOV.UK: Social functions and parties; HMRC: EIM21690).
The conditions
- It must be annual. It needs to be a recurring, once-a-year event. A one-off celebration, such as a 25th anniversary party, doesn’t count.
- It must be open to all staff. The event needs to be available to employees generally, or to all employees at one location if you have more than one site. Separate parties for different departments are fine, as long as everyone can attend one of them. A directors-only dinner doesn’t qualify.
- The cost per head must be £150 or less. This includes VAT, plus any transport or overnight accommodation you provide so people can attend.
How to work out the cost per head
Add up the total cost of the event and divide it by the total number of people who attend, including partners and other guests.
For example, a party costing £3,600 with 30 people attending works out at £120 per head, comfortably within the limit.
Virtual parties can qualify too, as long as all the other conditions are met. HMRC’s example is a virtual party with a £100 food and drink hamper per employee (HMRC: EIM21691).
It’s a limit, not an allowance
This catches people out. The £150 is not an allowance where you only pay tax on the excess.
If the cost per head goes over £150, even by a few pounds, the whole cost becomes a taxable benefit for each employee, including the cost of any guests they bring (HMRC: EIM21690).
Holding more than one event?
You can split the £150 across several annual events in the same tax year. If the combined cost per head stays at £150 or below, they’re all exempt.
If the total goes over, the events that make the best use of the £150 are exempt and the others are taxable. HMRC’s example is two dinner dances costing £100 and £80 per head. Together that’s £180, so the £100 event is exempt and the £80 event becomes a taxable benefit for those who attended it (HMRC: EIM21691).
Tax-free Christmas gifts: the trivial benefits rules
A festive gift such as a bottle of wine, a box of chocolates or a hamper can be completely tax-free as a “trivial benefit”. You don’t need to pay tax or National Insurance, or tell HMRC, if all of these apply (GOV.UK: Tax on trivial benefits):
- it cost you £50 or less to provide, including VAT
- it’s not cash or a cash voucher (a voucher that can be exchanged for cash)
- it’s not a reward for their work or performance
- it’s not in the terms of their contract
A Christmas gift given as goodwill is fine. A gift handed out for hitting targets, however small, isn’t a trivial benefit. Trivial benefits given through a salary sacrifice arrangement aren’t exempt either.
A non-cash gift voucher, such as a £25 supermarket voucher, can qualify (HMRC: EIM21866). And just like the party rule, £50 is a limit: if a gift costs more, the full amount is taxable, not just the excess (HMRC: EIM21865).
The £300 cap for directors of close companies
If you’re a director of a “close” company, which GOV.UK describes as a limited company run by five or fewer shareholders, you can only receive up to £300 of tax-free trivial benefits in a tax year (GOV.UK: Tax on trivial benefits).
The cap also covers benefits given to the director’s family or household members, so keep simple records showing you’ve stayed within it (HMRC: EIM21869).
What if something isn’t exempt? PAYE Settlement Agreements
If your party goes over £150 a head, or a gift doesn’t meet the trivial benefit rules, it’s normally taxable. For a party that isn’t exempt, you’d report the cost on each employee’s P11D form and pay employer’s Class 1A National Insurance on the full cost, and your staff would pay income tax on it (GOV.UK: Social functions and parties; HMRC: EIM21690).
Nobody wants staff facing a tax bill on a Christmas treat. That’s where a PAYE Settlement Agreement (PSA) helps.
A PSA lets you make one annual payment covering the tax and National Insurance on minor, irregular or impracticable expenses and benefits, so your staff don’t pay tax on them. You don’t need to put them through payroll or include them on P11D forms, and you pay Class 1B National Insurance instead of Class 1A. GOV.UK lists staff entertainment that isn’t exempt, and small gifts and vouchers, as examples of what can be included (GOV.UK: PAYE Settlement Agreements).
Key PSA dates for Christmas 2026
A party this December falls in the 2026 to 2027 tax year, so:
- the deadline to apply for a PSA is 5 July 2027
- any tax and National Insurance due under it must be paid by 22 October 2027
What you can include depends on when you apply, so it’s worth acting early. Once you have a PSA, it carries on each year until it’s changed or cancelled, but you’ll need to tell HMRC the value of the items it covers every tax year, even if that’s £0 (GOV.UK: PAYE Settlement Agreements).
VAT and corporation tax: the quick version
VAT
If you’re VAT registered, you can normally reclaim the VAT on staff entertainment such as parties, team-building and staff outings (HMRC: VAT Notice 700/65). There are a few exceptions:
- VAT on entertainment for directors, partners or sole proprietors only can’t be reclaimed, but it can be when they attend alongside other staff
- if staff bring guests who aren’t employees, you can only reclaim the VAT relating to employees, so you’ll need to apportion it
Corporation tax and income tax
Entertaining clients and giving them gifts is generally not tax-deductible, but staff entertainment is an exception. HMRC’s guidance specifically mentions a staff Christmas party. The cost is normally allowable against your profits, as long as it’s wholly and exclusively for the business and isn’t merely incidental to entertaining clients or other non-employees (HMRC: BIM45033; HMRC: BIM45034).
Gifts to employees are also deductible, as long as they’re not incidental to gifts given to others (HMRC: BIM45074).
A quick Christmas checklist
- Invite all staff, or everyone at a location
- Keep the total cost per head, including VAT, transport and guests, at £150 or less across the year’s annual events
- Keep gifts at £50 or less (including VAT), non-cash and not linked to performance
- Track trivial benefits for close company directors against the £300 cap
- Consider a PSA if anything falls outside the exemptions
This article is general information only, correct at the time of writing (12 October 2026). It isn’t financial, tax or legal advice and shouldn’t be relied on. Rules change and everyone’s circumstances differ, so take professional advice before acting. We accept no responsibility for any action taken based on this article.
Sources
- GOV.UK – Expenses and benefits: social functions and parties
- HMRC Employment Income Manual – EIM21690: Annual parties and other social functions
- HMRC Employment Income Manual – EIM21691: Annual parties and other social functions – examples
- GOV.UK – Tax on trivial benefits
- HMRC Employment Income Manual – EIM21865: Trivial benefits – the cost of the benefit
- HMRC Employment Income Manual – EIM21866: Trivial benefits – cash and cash vouchers
- HMRC Employment Income Manual – EIM21869: Trivial benefits – directors of close companies
- GOV.UK – PAYE Settlement Agreements (full guide)
- HMRC – Business entertainment (VAT Notice 700/65)
- HMRC Business Income Manual – BIM45033: Entertainment of employees
- HMRC Business Income Manual – BIM45034: Entertainment of employees – meaning of incidental
- HMRC Business Income Manual – BIM45074: Gifts to employees