As autumn sets in and the days grow shorter, many business owners are turning their attention to the festive season and planning the annual staff Christmas party. A highlight of the year for many teams, these events are a fantastic way to reward staff, boost morale and bring everyone together.
But there’s a catch: your festive celebrations could come with an unexpected tax bill if you don’t plan carefully.
The good news? HMRC provides a generous Annual Event Allowance that lets you spend up to £150 per employee (including VAT) each year on staff parties and events, tax-free. Managed correctly, your Christmas party can be both memorable and tax-efficient!
Here’s a breakdown of everything you need to know.
Can you claim tax relief on your staff Christmas party?
Yes, businesses can claim tax relief on staff entertainment through the Annual Event Allowance. This means your Christmas party can be fully tax-deductible if certain conditions are met.
- The event must be open to all employees: You can’t restrict the invitation to management or select teams.
- The cost must not exceed £150 per head: This includes VAT and covers everything from food and drinks to travel, accommodation, and entertainment.
- The £150 is an annual limit: If you’ve already spent part of it on a summer BBQ or another staff event, only the remaining allowance applies to your Christmas party.
- It must be an annual event: One-off celebrations, like a company anniversary, won’t qualify.
What if you go over the £150 limit?
Here’s where businesses often get caught out. If the cost per head exceeds £150, even by a small amount, the entire cost becomes taxable, not just the excess.
For example:
- If your party costs £145 per head, it’s tax-free.
- If it costs £160 per head, the whole £160 becomes a taxable benefit for employees.
In that case, your staff may face extra personal tax charges, and your business will need to report the benefit on a P11D form. Alternatively, you can enter into a PAYE Settlement Agreement (PSA), where the company covers the tax and National Insurance on behalf of employees.
VAT claims on staff entertainment
Even better news, if your Christmas party is exclusively for employees, you can claim back the VAT on related expenses. However, if you invite customers, suppliers, or your employees’ partners, VAT recovery will be restricted, and you can only reclaim the portion attributable to staff.
Why planning matters
The £150 allowance hasn’t increased in over 20 years, despite rising event costs. That means more businesses are at risk of tipping over the threshold. Careful planning, factoring in transport, accommodation and other extras, is key to avoiding unexpected tax liabilities. In summary:
- £150 per head (VAT inclusive) covers all costs for staff Christmas parties and annual events.
- If you exceed the limit, the entire cost becomes taxable.
- VAT is reclaimable if the event is only for employees.
- If you exceed the limit, consider using a PSA to settle the tax on behalf of your staff.
Ready to host your work Christmas party?
The last thing you want is for festive cheer to be dampened by an unexpected tax bill. By planning carefully and keeping within HMRC’s rules, you can maximise tax relief while giving your team the celebration they deserve.
Need advice on making your staff Christmas party tax-efficient? Contact your local expert team today, and we’ll help you navigate the rules so you can focus on what matters the most. Celebrating with your team!
