‘Tis the season to be jolly…

Merry Christmas!
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    Disclaimer: This article is based on legislation which was correct at time of publishing on December 6, 2021
    This page was last updated on September 21, 2023

    After a year off the office Christmas party is coming back. Love it or hate it, staff entertainment has always played an important part in team building, but whilst the cost of entertaining employees is an allowable deduction for the business, it is not always tax free for the employee. For many years there has been a tax exemption that covers the reasonable cost of an annual function – usually the Christmas party. An event that costs no more than £150 (including VAT) per head will be free of tax for the employee. The limit is calculated on the basis of the number of people attending, so that if partners and families are allowed to attend, they will also count towards calculating the per head cost of the event.

    The annual function exemption can apply to more than one event in a tax year, so if the Christmas party costs substantially less than £150 you could throw in a summer BBQ or a trip to the races, for example, to make use of the remaining relief. However, you need to be careful that the per head cost of the additional event is less than the balance of the cap remaining. If the total cost of the annual functions is more than £150 per head they won’t all be covered.

    Unfortunately, the £150 per head exemption only applies to Annual events, which is why it fits the Christmas party so well. It isn’t suitable for one off events, so if you have previously had summer BBQ’s or race days they can be covered by the exemption, but if you never had them before, this year’s event might not qualify for the exemption, whereas next year’s would. However, a relatively new exemption for small gifts may come to the rescue if you think a one off BBQ, curry night or trip to the pub is going to help morale. The exemption allows an employer to make gifts of up to £50 (including VAT) per time to employees without attracting tax or National Insurance. There isn’t a limit to the number of times you can use this exemption, apart from gifts to company directors which are limited to £300 per tax year, but you cannot give it to employees instead of paying salary. The gift should not be linked to past or future services.

    Most employers would not want employees to suffer tax on something they had intended to be a gift, so if you do find that you have spent more than the allowances will cover, you can agree with HMRC to meet any tax and National Insurance liabilities that arise on behalf of the employees. You would need to make this arrangement with HMRC before 5 July following the tax year end, but it is always best to start the process as soon as possible, preferably before the tax year end.

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