As the year draws to a close and the festive season approaches, many UK businesses are busy planning Christmas parties, team celebrations, and staff gifts. Before you finalise your christas plans, it’s important to understand how HMRC’s tax rules apply to staff entertainment and seasonal presents.
This guide explains the key HMRC rules for Christmas parties and gifts, including how to stay within the £150 per head exemption and what counts as a taxable benefit.
Staff Christmas Parties & Employee Social Events
HMRC offers a specific tax exemption for annual staff events, but it only applies if all of the following conditions are met:
- The event is an annual function (for example, a Christmas party or summer gathering).
- It is open to all employees or all staff at a specific site or branch.
- The total cost does not exceed £150 per head (including VAT).
What costs are included?
When calculating the cost per head, you must include everything connected to the event — venue hire, food, drinks, entertainment, transport, and accommodation.
If employees’ guests (such as partners or spouses) attend, you must also count them in the headcount when dividing the total cost.
Multiple staff events during the year
If you hold more than one event (e.g. a summer party and a Christmas dinner), you can apply the exemption to one or more of them — as long as the combined cost per head does not exceed £150.
If the total goes over this limit, even by £1, the full amount becomes taxable.
💡 Tip: The £150 limit is an exemption, not an allowance. If your cost per head is £155, the entire £155 is taxable, not just the £5 excess.
When the exemption doesn’t apply
If your event costs more than £150 per head or isn’t open to all employees, it counts as a taxable benefit in kind. In that case:
- You must report it on each employee’s P11D form.
- Employees pay income tax on the benefit.
- Employers pay Class 1A National Insurance.
- Alternatively, you can include the benefit in a PAYE Settlement Agreement (PSA), allowing the company to cover the tax liability on behalf of staff.
Corporate Tax and VAT treatment
Corporation tax: Costs of employee entertaining (such as Christmas parties) are usually tax-deductible.
VAT: Input VAT can generally be reclaimed for employee entertainment, but not for guests. If guests attend, you’ll need to apportion VAT accordingly.
Christmas Gifts, Vouchers & Trivial Benefits
Gifting your team is a great way to celebrate the holidays — but not all gifts are tax-free. Here’s how HMRC classifies them:
- Cash and cash vouchers
- Any cash payments or vouchers exchangeable for cash are treated as earnings.
- These are subject to PAYE income tax and National Insurance contributions (NICs).
Non-cash gifts and vouchers
Non-cash vouchers (those that can only be used to buy goods or services) are normally taxable and must be reported on the P11D.
However, they can be exempt under the HMRC trivial benefits rule if they meet these conditions:
- The cost does not exceed £50 including VAT.
- The gift is not cash or a cash voucher.
- It is not a reward for work performance or contractual.
- It is a genuine gift, such as a token of appreciation.
If your gift meets these criteria, no tax or National Insurance is payable, and you don’t need to report it to HMRC.
Examples of tax-free Christmas gifts
- A bottle of wine, a box of chocolates, or a festive hamper.
- A small non-cash voucher worth under £50.
- Seasonal treats such as a turkey or Christmas pudding.
These are generally considered trivial benefits and are not taxable if the rules are followed.
Key Takeaways for Businesses
- Keep accurate records of party costs, attendees, and gift values.
- Remember the £150 per head exemption applies only if all HMRC criteria are met.
- The trivial benefit exemption can make small gifts tax-free, but not cash or performance rewards.
- For larger events or gifts, consider a PAYE Settlement Agreement to simplify reporting.
Plan Ahead for a Stress-Free Festive Season
By understanding HMRC’s rules in advance, you can reward your employees confidently and keep your Christmas celebrations tax-efficient.
If you’d like expert help reviewing your Christmas party plans, staff gifts, or PSA arrangements, our team can guide you through the process and ensure full HMRC compliance.
Contact Johnston Wood Roach Chartered Accountants and Chartered Tax Advisors in Hampshire today to make this year’s festive season compliant.
