Your staff Christmas party is tax-free for employees if it meets the annual function exemption in Section 264 ITEPA 2003: it must be an annual event, open to all employees generally, and cost £150 or less per head including VAT, transport and accommodation. Spend a single penny more per head and the whole cost, not just the excess, becomes a taxable benefit in kind. That £150 has been frozen since 6 April 2003 and is still £150 for 2026/27.
With roughly 100 days to Christmas as we publish this in September 2026, now is the time to plan the budget so you stay the right side of the line. This guide walks through the conditions, the cost-per-head sum, the cliff-edge trap, what to do if you go over, and how a separate £50 trivial benefit can sit on top.
What is the £150 Christmas party tax exemption?
The annual function exemption lets an employer provide social functions, such as a Christmas party or a summer party, without the cost being taxed as a benefit in kind on employees, as long as the cost per head is £150 or less across the tax year. It is an exemption written into Section 264 ITEPA 2003, and HMRC set out the detail in its Employment Income Manual at EIM21690.
Crucially, £150 is not an allowance you can spend and then top up. It is a ceiling. If you land at or under it for the qualifying events, the benefit is fully exempt. If you go over, none of it is exempt.
| Item | 2026/27 position |
|---|---|
| Annual function exemption (per head, per tax year) | £150, VAT-inclusive |
| Frozen since | 6 April 2003 |
| Trivial benefits limit (separate rule) | £50 or less per gift |
| Directors of a close company: trivial benefits cap | £300 per tax year |
| Employer Class 1A NIC (if reported on P11D) | 15% |
| Employer Class 1B NIC (if settled via a PSA) | 15% |
| Standard VAT rate | 20% |
What are the three conditions?
All three must be met for the event to qualify:
- It must be annual or recurring. A one-off celebration (say, to mark a contract win) does not qualify. A Christmas party or an annual summer event does.
- It must be open to all employees generally. If you have more than one site, an event open to all staff at a single location also counts. A party for directors only, or for one favoured team, fails this test.
- It must cost £150 or less per head. That figure is VAT-inclusive and includes everything associated with the event: food, drink, entertainment, venue hire, transport home and any overnight accommodation.
How do you work out the cost per head?
Take the total cost of the event, including VAT and every associated cost above, and divide by the total number of people attending. That total includes non-employee guests such as partners, not just employees.
So if you invite partners, they increase the denominator (which helps) but the money spent on them still counts in the numerator. The arithmetic is simply total cost divided by total heads through the door.
The £150 cliff edge: why 1p over costs you everything
This is the point that catches employers out every December. The £150 is an exemption, not an allowance. If the cost per head comes to £150.01, the whole amount is a taxable benefit in kind, not just the 1p (or the excess) over £150.
There is no tapering and no partial relief. You either clear the bar or you do not. That is why a sensible budget aims comfortably below £150, leaving headroom for last-minute extras like a bar tab or taxis home that quietly push the per-head figure up.
Multiple functions: how the £150 annual pot works
If you hold more than one annual function in the tax year, treat the £150 as an annual pot to be allocated for the best result. You can use it to cover whichever combination of events keeps the total within £150 per head. But any single event that on its own costs more than £150 per head can never be exempt, because it breaches the ceiling by itself.
Worked illustration: you run a summer party at £100 per head and a Christmas party at £70 per head. Together that is £170, over the £150 pot. You cannot split the pot across both. You cover the £100 summer party (exempt) and the £70 Christmas party is then taxable in full. Pick the allocation that shelters the larger cost.
What happens if you exceed the £150 (or the event does not qualify)?
The benefit becomes reportable, and you have two routes:
- Report on each employee's P11D. The cash equivalent goes on the P11D and the employer pays Class 1A National Insurance at 15% (2026/27) on that value. The employee is then taxed on the benefit through their tax code.
- Set up a PAYE Settlement Agreement (PSA). The employer settles the income tax due and pays Class 1B National Insurance at 15% (2026/27) on the employees' behalf, keeping the party tax-free to staff. Most employers choose this so nobody ends the year with a surprise tax bill for enjoying the Christmas do.
For a wider refresher on employer NIC rates, see our guide to employers' National Insurance for 2026/27, or model the numbers with the National Insurance calculator.
Worked example: a Christmas party that tips over
Northgate Ltd holds one annual Christmas party for its 10 employees, and each brings a partner, so 20 people attend. The total bill, including food, drink, a DJ, venue hire and taxis home, comes to £3,200 including VAT.
- Cost per head = £3,200 ÷ 20 = £160.
- £160 is over £150, so the exemption is lost entirely. The whole £160 per head is taxable, not just the £10 excess.
- Each employee's taxable benefit covers their own place and their partner's: £160 + £160 = £320 per employee. Across 10 employees that is £3,200 of taxable benefit.
Option A, P11D route: report £320 per employee on the P11D. Employer Class 1A NIC = £3,200 × 15% = £480, and each employee is taxed on their £320 benefit.
Option B, PSA route: the employer settles the employees' income tax on the grossed-up value and pays Class 1B NIC at 15%, so staff pay nothing and the party stays a genuine perk.
Contrast that with keeping the bill to £2,990 (£149.50 per head). The event would have qualified, and there would be nothing to report at all. A £210 saving on the bar tab would have avoided both the tax and the NIC entirely.
Can you add a £50 Christmas gift on top?
Yes. The trivial benefits rule in Section 323A ITEPA 2003 is a separate relief, so a small gift can sit alongside the £150 party exemption. A benefit is tax-free if it costs £50 or less, is not cash or a cash voucher, is not a reward for work or performance, and is not written into the contract.
So a £50 hamper or store voucher handed out at Christmas is tax-free on top of the party. There is no cap on the number of trivial benefits for ordinary employees, but directors and other office-holders of a close company are limited to £300 of trivial benefits per tax year. For the detail, read our guides on trivial benefits and tax-free employee perks.
What about VAT and Corporation Tax?
VAT: input VAT on staff entertaining is recoverable. But the portion relating to non-employee guests, such as partners or clients, is blocked, or you must account for it as output tax. So on a party with partners attending, you can reclaim the VAT on the employee share and not the guest share.
Corporation Tax: the cost of an annual staff function is an allowable deduction, unlike client entertaining, which is disallowed. Staff parties are staff welfare, so the spend reduces your taxable profit. If you are planning other year-end moves, see how to reduce Corporation Tax legally.
Why is the £150 limit still £150 in 2026?
The limit has not moved since 6 April 2003. More than two decades of inflation have quietly eroded it, and the Association of Taxation Technicians has called for it to rise to at least £280 to reflect that. Until any change is announced, plan on £150 per head for 2026/27, confirmed in gov.uk's HS207 guidance for 2026.
If you are also sorting festive logistics, our last posting dates for Christmas 2026 guide is worth a look while you plan.
Get the party planned tax-free
Keeping under £150 per head, reclaiming the right VAT and, if needed, arranging a PSA are all easy to get slightly wrong under December time pressure. If you want a second pair of eyes on the numbers before you book, book a free call with Zmartly. As a CIMA-regulated firm with qualified accountants, we will help you keep the celebration a genuine perk rather than an accidental tax bill.
Frequently asked questions
Is the £150 an allowance I can spend before it is taxed?
No. It is an exemption, not an allowance. If the cost per head is £150 or less the whole event is tax-free, but if it exceeds £150 by even 1p the entire cost becomes a taxable benefit in kind, not just the excess.
Do partners and guests count in the cost-per-head calculation?
Yes. You divide the total cost of the event, including VAT, transport and accommodation, by everyone attending, including non-employee guests such as partners. Their heads increase the divisor, but the money spent on them still counts in the total.
Can I give a Christmas gift as well as the party?
Yes. Trivial benefits are a separate rule, so a gift costing £50 or less that is not cash, not a reward for work and not in the contract can be given tax-free on top of the £150 party exemption. Directors of a close company are capped at £300 of trivial benefits a year.
What do I pay if the party goes over £150 per head?
You either report the cash equivalent on each employee's P11D and pay employer Class 1A NIC at 15% for 2026/27, or set up a PAYE Settlement Agreement, settle the employees' income tax and pay Class 1B NIC at 15%, which keeps the benefit tax-free to your staff.
Sources
- gov.uk: Expenses and benefits, social functions and parties, what's exempt
- HMRC Employment Income Manual EIM21690: annual parties and functions
- gov.uk: Expenses and benefits, trivial benefits
- gov.uk: Rates and thresholds for employers 2026 to 2027
- HMRC Business Income Manual BIM45033: staff entertaining
