Christmas party tax exemption: the £150 limit explained

This article is stated as at 31 October 2026. The phased mandatory payrolling of benefits from 6 April 2027 and 6 April 2028 has been announced but is still in draft legislation, so the detail may change. Take advice on your own circumstances before acting.

Under the Christmas party tax exemption, an annual party or similar function open to all your staff, or to all staff at one location, is free of income tax for employees, with no Class 1A National Insurance, if it costs £150 a head or less. That figure includes VAT, transport and any hotel rooms provided so people can attend. The £150 is a limit rather than an allowance, so at £151 a head the whole £151 is taxable. And every annual event in the 2026/27 tax year shares the same £150.

What does the Christmas party tax exemption cover?

The rule sits in section 264 of the Income Tax (Earnings and Pensions) Act 2003 and applies across the UK. HMRC’s guidance sets three tests: the event must be open to all your employees, it must be annual (a Christmas party or summer barbecue, for example) and it must cost £150 or less per person.

Open to all. A party for everyone in the business qualifies. A directors-only dinner does not, even when a staff party is held as well. In HMRC’s own example, the all-staff party at £50 a head is exempt, but the directors are taxed on the full cost of their separate £75 a head event. With more than one site, a party for everyone at one location qualifies, and at a single site you can hold separate departmental parties as long as every member of staff can go to one of them.
Annual. HMRC reads this as something that happens once a year on a recurring basis. A one-off celebration, such as a 25th anniversary party, cannot qualify.
£150 a head. The limit has been £150 since 2003, so it buys less each year.

Online events count too. HMRC’s example is a virtual party where each invited employee is sent a hamper of food and drink to enjoy during it, at £100 a head in total, which is exempt. Handing staff cash to arrange their own night out is different, because HMRC treats it as pay rather than the cost of a party. The exemption sits alongside the other ways of rewarding your staff through the year, but it has the tightest rules.

How do you work out the cost per head?

Cost per head is the total cost of the party, plus any transport or accommodation provided so that people can attend, divided by the number of people who attend, whether or not they are employees. The total includes VAT.

The sums usually go wrong in one of three places. A venue quote that leaves out VAT has to be checked at the VAT-inclusive price. The coach, taxis home or hotel rooms you book so people can attend belong in the total. And the divisor is the number who actually turned up, not the number invited. Venue hire and the coach cost the same whether 40 people come or 35, so no-shows push the average up.

Hypothetical party (2026/27, UK-wide rule)	40 attend	36 attend	35 attend
Total cost including VAT, coach and venue	£5,400	£5,400	£5,400
Cost per head	£135	£150	£154.29
Within the £150 limit?	Yes	Yes, just	No

The table assumes venue, coach and catering were booked in advance at a fixed price.

We’d set the budget comfortably below £150 a head, all in, to leave room for late extras and empty chairs. Keep the invoices and a note of who attended, because that is the evidence for your figure if HMRC asks; our article on keeping your books in good order explains why the habit pays.

Partners and other guests need care. The legislation is clear that guests count in the divisor, and HMRC’s guidance on annual parties says that if the party falls outside the exemption, the employee is taxed on their guest’s share too. It does not settle in terms whether an employee and their partner are tested together. On the cautious reading, an employee and partner at £80 each come to £160 and are over the limit. If partners are invited and the cost per head is anywhere near £75, take advice before relying on the exemption.

What happens if the party costs more than £150 a head?

HMRC is plain that the £150 is not an allowance. If the party falls outside the exemption, each director and employee who attends is taxed on the full cost per head, not just the excess, and on the cost of any family or household members who came as their guests. The employer has to report the benefit on each employee’s P11D and pay Class 1A National Insurance on the full cost, at 15% for 2026/27.

Take the 35-attendee party in the table. It is only £4.29 a head over the limit, but every member of staff who attended is taxed on the whole £154.29 (plus the same again for any guest they brought) at their own rate of income tax, and the employer pays Class 1A of £810 (15% of £5,400). An overspend of about £150 across the whole party produces a bill several times that size. Many employers in that position settle the tax themselves through a PAYE Settlement Agreement, covered below.

Does a summer barbecue count towards the £150?

Yes. All the annual functions in one tax year share a single £150 a head, and for 2026/27 that means events between 6 April 2026 and 5 April 2027. If the combined cost per head is £150 or less, they are all exempt. If it goes over, the functions that make the best use of the £150 are exempt and the rest are taxable in full, and because HMRC’s rule lets you choose, a later, cheaper event is not automatically the one taxed.

Suppose a business held a summer barbecue in July 2026 at £60 a head and books a Christmas party for December 2026 at £100 a head, each worked out on the number who actually attended.

Event (2026/27, UK-wide)	Cost per head	Treatment
Summer barbecue, July 2026	£60	Taxable for those who attended
Christmas party, December 2026	£100	Exempt
Combined	£160	Over £150, so only one can be exempt

Exempting the Christmas party leaves £60 taxable for each person who went to the barbecue, with Class 1A of £9 per attendee (15% of £60), and staff who only came at Christmas pay nothing. Exempting the barbecue instead would leave £100 a head taxable for everyone at the Christmas party, so with similar numbers at each event, exempting Christmas is the better choice. Better still, a Christmas budget of £90 a head would have kept both events within £150 and both exempt.

So before you book, take this year’s earlier events off £150 to find your headroom. Once the £150 has gone, a later event such as a team-building day in February 2027 is taxable in full, even if it costs well under £150 on its own.

Paying the tax: P11D or a PAYE Settlement Agreement?

On the P11D route, you report the benefit on each employee’s P11D, file the P11D and P11D(b) by 6 July 2027 and pay the Class 1A by 22 July 2027 (19 July 2027 if paying by cheque). A late P11D(b) costs £100 per 50 employees for each month or part month. Staff then pay income tax on the benefit themselves.

Under a PAYE Settlement Agreement (PSA), the employer pays the tax and National Insurance so staff do not. Items in a PSA must be minor, irregular or impracticable, and GOV.UK lists staff entertainment that is not exempt as impracticable, so a party that tips over the limit is a natural fit. Apply by 5 July 2027 for 2026/27 and pay by 22 October 2027 (19 October 2027 by post). The employer pays Class 1B National Insurance at 15% instead of Class 1A. A PSA costs the business more than the P11D route, because it is also bearing the staff’s tax, so ask us for a calculation before you apply. Many owners prefer that to a surprise tax bill for the team.

Two other points. If the party forms part of a salary sacrifice arrangement, you must report its value even if it would otherwise be exempt, and where the cost is less than the salary given up you report the salary amount instead. And mandatory payrolling of benefits, announced to start on 6 April 2027, covers only company cars, vans, car and van fuel and medical benefit at first, so staff entertainment stays on the P11D or a PSA for 2027/28. Our note on getting savvy with staff benefits looks at the wider package.

Can you claim the VAT and corporation tax relief?

Hospitality for employees is not business entertainment for VAT, so the input VAT on the staff share of the party can normally be reclaimed. Employees here include directors, partners in a partnership business and temporary or casual staff. An employee’s partner, relative or friend is not an employee, nor is a shareholder who is not also an employee, so the VAT on their share is blocked. Where guests attend you will need to apportion the VAT, and we can agree the method with you.

For corporation tax (or income tax for a sole trader or partnership), genuine staff entertaining is an allowable cost. The relief is lost if the staff entertainment is incidental to entertaining customers or others who are not employees, and HMRC’s test is whether you would have paid for the event with no guests present. A staff party to which partners are invited should meet that test, because you would have held it without them; a client hospitality evening with a few staff along does not. Our piece on tax relief at Christmas covers gifts and other seasonal costs.

Christmas party tax exemption: key dates for 2026/27

Date	What happens (UK-wide, 2026/27 unless stated)
6 April 2026 to 5 April 2027	Tax year 2026/27: all annual events share one £150 a head limit
5 April 2027	Tax year 2026/27 ends; last day to withdraw from voluntary payrolling of benefits (announced)
6 April 2027	Mandatory payrolling begins for cars, vans, fuel and medical benefit (announced); staff entertainment stays on P11D or PSA for 2027/28
5 July 2027	Deadline to apply for a PSA covering 2026/27
6 July 2027	P11D and P11D(b) for 2026/27 due
22 July 2027	Class 1A National Insurance for 2026/27 due by electronic payment (19 July 2027 by cheque)
22 October 2027	PSA tax and Class 1B National Insurance for 2026/27 due by electronic payment (19 October 2027 by post)
6 April 2028	Mandatory payrolling extends to most remaining benefits in kind (announced)

Questions clients ask

Our party costs £160 a head: is only the extra £10 taxed?

No. HMRC says the £150 is not an allowance, so once the cost per head goes over the limit, each employee who attends is taxed on the full £160, not just the £10 excess, and on the cost of any guests they bring. The employer reports it on P11Ds and pays Class 1A National Insurance at 15% on the full cost for 2026/27, or settles the tax through a PAYE Settlement Agreement so staff don't get a bill.

Can a company with just two directors and no staff have a tax-free Christmas party?

Possibly. The test is whether the party is available to the company's employees generally, and HMRC's example of a taxable directors-only party is one where other staff were left out. Where the directors are the only employees, the wording of the legislation may be met, but the event must still be annual and within £150 a head including guests, and VAT on a partner's share is blocked. Take advice on the facts first.

Do drinks the business pays for at the bar count towards the £150?

Yes. The cost per head is the total cost of providing the party, including VAT, so food and drink the business pays for, including a bar tab settled directly by the business, counts towards the £150. Divide the full total by everyone who attended, guests included.

Is the £150 per employee, or does my partner get their own £150?

Guests count in the cost per head: you divide the total cost by everyone who attended, staff and guests alike. If the party falls outside the exemption, the employee is taxed on their guest's share as well as their own. HMRC's guidance does not say that a partner brings a separate £150, so on the cautious reading an employee and partner at £80 each come to £160 and are over the limit. Take advice before relying on the exemption.

Do we need to keep a record of who went to each staff event?

HMRC does not expect employers to keep a cumulative record, employee by employee, of every function attended. You do need to know the total cost of each event, including VAT, transport and accommodation, and how many people actually attended, guests included, because that is how the cost per head is worked out. Keeping the invoices and an attendance list with your payroll records is the simplest way to support the figure.

Speak to us. To discuss how this affects you or your business, please contact your usual Jack Ross partner, call us on 0161 832 4451 or send us a message.

Christmas party tax exemption and the £150 per head limit