September is when the venue deposits get paid. Book the Christmas do now and you get the date you want, which is why the tax question lands in autumn rather than December, by which time it is usually too late to do anything about it.
The good news is that the rules are unusually generous, and unusually unforgiving. Get them right and the party, the gift and the meal are all tax free. Get them wrong by a pound and the whole lot becomes a taxable benefit. Here are the four numbers that decide which.
£150 a head for the party
There is a specific exemption for annual social functions. If your company puts one on and it meets the conditions, there is no Income Tax, no National Insurance and nothing to report.
The conditions are short:
- It has to be an annual event, such as a Christmas party or a summer barbecue. A one-off celebration for winning a contract does not qualify.
- It has to be open to all employees, or to everyone at a particular location if you have more than one site.
- The total cost must not exceed £150 per head.
That £150 covers everything the company pays out. Food, drink, the venue, the entertainment, the taxis home and a hotel room if you put people up, all of it including Value Added Tax. Divide the full bill by the number of people who actually attend, not the number you invited.
Guests count as heads. If you take your other half and the company pays, that is two heads at up to £150 each, so £300 of spending for the pair of you.
And yes, a company with one director counts. If you are the only employee, the event is open to all employees by definition. A table for two at a decent restaurant in December, once a year, is a legitimate use of this exemption rather than a loophole.
The cliff edge, which is the part that hurts
This is an exemption, not an allowance. The difference matters more than any other sentence in this article.
Spend £150.00 a head and nothing is taxable. Spend £150.01 a head and the entire amount becomes a taxable benefit, not just the penny over. On a party of ten costing £1,505, that is £1,505 going on the benefit in kind, not £5.
The £150 is also the total for the whole tax year across every annual event, not per party. Hold a summer barbecue at £60 a head and a Christmas party at £70 a head and you are fine at £130. Hold the same barbecue and then a £100 Christmas party and you are at £160, so one of the two events has to be taxed. You can choose which, and you would obviously choose the cheaper one.
So work out the cost per head before you book, not after. Add a margin for the drinks nobody budgeted for.
If you do go over, it is not a disaster and it is not something to hide. The company can arrange a PAYE Settlement Agreement with HMRC and pay the tax and National Insurance on the employees’ behalf, so nobody gets an unexpected bill in their tax code. It costs the company money, but it costs goodwill not to.
£50 for a gift, and £300 a year if you are a director
The second number is the trivial benefits exemption. Your company can give an employee something worth £50 or less, tax free, with nothing to report, as long as four things are true:
- It costs £50 or less, including Value Added Tax.
- It is not cash, and not a voucher that can be exchanged for cash. A store gift card is fine. Cash is not.
- It is not a reward for work or performance. A thank you for a good quarter fails this test.
- It is not in their contract or any other entitlement.
A hamper, a bottle of something, a gift card for a shop, flowers: all fine at £50 or less. This is a per gift limit rather than an annual one for ordinary employees, so there is no set number of times you can use it in a year, provided each gift genuinely stands on its own.
Directors of small companies get one extra rule. If yours is a close company, which almost every owner managed company is, trivial benefits to a director are capped at £300 a year in total. That is six £50 gifts, and it is per director, so a husband and wife who are both directors have £600 between them.
Like the party, it is a cliff edge. A £51 gift is not a £50 exemption plus £1 of tax. It is £51 of taxable benefit.
One thing that catches people every December: a cash Christmas bonus is not a gift. It is pay. It goes through the payroll with Income Tax and National Insurance like any other salary, however festive the envelope.
Staff yes, clients no
The third rule is about Corporation Tax rather than benefits, and it is the one that surprises business owners most.
Entertaining your staff is an allowable business expense. The Christmas party reduces your company’s taxable profit in the normal way, and if you are registered for Value Added Tax you can reclaim the VAT on it.
Entertaining clients is not. You can pay for it out of the company, and plenty of businesses rightly do, but it does not reduce your Corporation Tax bill and you cannot reclaim the VAT. This is true whether it is a Christmas lunch, a day at the races or a coffee. It is a real business cost that the tax system simply declines to recognise, which is covered in more detail in our guide to allowable expenses.
Mix the two and you have to split the bill. If clients come to the staff party, the VAT on the staff portion is reclaimable and the VAT on the client portion is not, so keep a note of who was there.
£50 for a client gift, with a logo on it
The fourth number applies to gifts going out rather than in. A gift to a client is normally treated as entertaining, and so is not allowable. There is one exception, and it is narrow.
A business gift is allowable if it costs £50 or less per recipient per year, carries a conspicuous advertisement for your business, and is not food, drink, tobacco or a voucher. In practice that means branded items. A mug, a diary, a decent pen with your name on it.
A bottle of wine with your logo on the label is still a bottle of wine, so it fails. A hamper fails. The rule was written to allow promotional merchandise rather than presents, and it does exactly that.
Go a penny over £50 to any one recipient across the year and the whole amount is disallowed, which by now will be a familiar pattern.
What to do before you book
None of this needs a spreadsheet, but it does need five minutes.
- Work out the cost per head first. Total spend divided by people actually attending, including any guests and including Value Added Tax.
- Check what you have already spent this tax year on other staff events, because the £150 is shared across all of them.
- Keep the invoices and a list of who attended. If the party is ever questioned, the attendance list is the evidence.
- Keep staff and client entertaining on separate invoices where you can, so the split is obvious later.
- Do not pay for it personally and sort it out afterwards. Company costs belong on the company account. Paying for the party from your own pocket and reclaiming it in an unstructured way is how balances end up on a director’s loan account.
From April 2027 most benefits in kind have to be reported through the payroll every pay day rather than once a year on a form P11D, so anything taxable will show up much sooner than it used to. Our guide to payrolling benefits in kind explains what is changing.
We will tell you before you book, not after
The frustrating thing about all of this is that every decision is made in September and October, and the tax consequence turns up the following summer, when the party is a distant memory and nothing can be changed. We would rather have the conversation while you are still choosing the venue.
Looking after the payroll, the benefits, the Corporation Tax return and the filing dates is part of what we do for limited company clients as a matter of course. Ltd Company Starter is from £105 per month, and Growing Strong, for companies wanting more planning through the year, is from £205 per month. Both are fixed fees, with no charge for picking up the phone to ask whether something counts.
If you would like the Christmas do costed properly before you pay the deposit, Get your instant quote and see your fixed monthly fee in under a minute.