Christmas Party Tax Allowance: The £150 Per Head Rules and Exemptions

The Christmas party tax allowance in the UK lets an employer spend up to £150 per head, VAT included, on an annual staff function without creating any tax charge for employees. It sits in Section 264 of the Income Tax (Earnings and Pensions) Act 2003 and has held at that figure since 2003.¹ The trap most employers walk into: £150 is an exemption, not an allowance. Go a single pound over, and the whole cost per head becomes taxable, not just the excess.

The Three Conditions You Have to Meet

All three apply, and missing any one of them takes the event outside the exemption.

The event has to be annual. Something that recurs each year qualifies; a one-off, such as a company anniversary or a product launch, does not.²

It has to be open to all employees. Where the employer operates from more than one site, “all employees at a particular location” is enough, so a Manchester office and a London office can each hold their own party. A party restricted to senior management or to one department fails this test.²

The cost per head cannot exceed £150 including VAT.¹

Working Out the Cost Per Head

The cost per head is the full cost of the event divided by the number of people who actually turn up. Everyone attending goes into the denominator, including partners, spouses, and any other guests. Inviting guests can therefore push your per-head figure down.¹

The total cost must capture every expense connected with the event:

Food and drink, including the bar tab
Venue hire, decoration, and any setup fees
Entertainment such as DJs, bands, or photo booths
Transport laid on to get people to and from the venue
Accommodation booked for employees or their guests

Every figure is VAT-inclusive. Even if the business normally reclaims VAT on its returns, the £150 test is applied to the gross price.¹ A worked example: a party costs £2,400 in total and 20 people attend (12 employees plus 8 partners). Cost per head is £120, comfortably within the limit.

Running More Than One Event

Plenty of employers hold both a summer social and a Christmas dinner. Where there are two or more qualifying annual events, you add the costs per head together. If the combined figure is £150 or less, both events are exempt. If it goes over, you pick the event or combination that best uses the £150, and the rest is taxable.²

Say the summer barbecue works out at £40 per head and the Christmas dinner at £120 per head. Together that is £160, so you can’t shelter both. The sensible choice is to exempt the Christmas dinner and treat the barbecue as the taxable event, because that shelters the larger expense. The taxable event then becomes a benefit in kind for the employees who attended.¹

What Happens If You Go Over £150

The £150 is not a tax-free slice of a bigger bill. If your cost per head lands at £155, the full £155 is taxable for each employee, not just the £5. HMRC is explicit: employees are charged on the whole cost per head, and each employee is also charged for any family or household members who came along as their guests.²

When an event doesn’t qualify, the employer has to:

Report the cost as a benefit in kind on each affected employee’s P11D
Pay Class 1A National Insurance at 15 percent (the rate from 6 April 2025) on the full benefit value³

The employee also owes income tax on the benefit, usually collected through a tax code adjustment. Which is why estimating the per-head cost before you commit to a venue matters. Spending £151 per head doesn’t just cost an extra pound; it drags the whole amount into charge.⁴

Settling the Bill Through a PSA

Rather than pushing the charge onto individual employees, an employer can use a PAYE Settlement Agreement to pay the income tax and NICs itself. PSAs are designed for benefits that are minor, irregular, or impracticable to split between employees. Staff entertaining over the £150 line fits the impracticable category well, because carving up the exact benefit per attendee is awkward.⁵

You have to apply for a PSA by 5 July following the end of the tax year in which the event took place. Once agreed, you settle the tax and Class 1B National Insurance in a single payment, and nothing appears on employees’ tax codes. For a Christmas party held in December 2025, the deadline is 5 July 2026.

VAT on Party Costs

The income tax exemption and the VAT rules run on separate tracks. Even if you breach the £150 threshold for income tax, the VAT position is unaffected: entertainment provided to your own employees for morale or reward counts as staff entertainment, and the input VAT is fully recoverable.⁶

Non-employee guests are a different matter. Entertaining people who don’t work for you falls under business entertainment, and VAT on that portion is blocked. If 30 people come to the party and 10 of them are partners of employees, you apportion the costs and recover VAT only on the 20-person employee share.⁶ A guest list and itemised invoices make that split clean at filing time.

Who Cannot Use the Exemption

Section 264 is written for employers entertaining their employees, which shuts out several common set-ups.

Sole traders and partners in a partnership. There is no employer-employee relationship with the owner of the business, so the exemption does not apply to a sole trader taking associates out for a Christmas meal.
Director-only companies with no other staff. An exception may apply where the entertainment happens during a business trip away from the usual place of work, but that is a narrow situation.
Client entertaining. A party for customers, suppliers, or other external contacts is business entertainment. It is neither deductible for corporation tax nor covered by the annual party exemption.

Limited companies with at least one employee beyond the directors can use the exemption in the normal way, provided the event is open to all staff and the other conditions are met.

1
legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003
2
HM Revenue & Customs. Employment Income Manual – Particular Benefits: Annual Parties and Other Social Functions
3
GOV.UK. National Insurance Rates and Categories: Contribution Rates
4
GOV.UK. Expenses and Benefits: Social Functions and Parties – What to Report and Pay
5
GOV.UK. PAYE Settlement Agreements – Whats Included
6
HM Revenue & Customs. Business Entertainment (VAT Notice 700/65)