Staff Entertaining & the £150 Corporation Tax Exemption

The £150 staff entertaining exemption lets an employer put on an annual party or similar social function without the cost counting as a taxable benefit for the employees who attend, provided the cost per head stays at or below £150 including VAT. It sits alongside, but works independently from, the company’s corporation tax deduction for staff entertaining. A business can still deduct the full cost of a lavish Christmas party from its taxable profits even when the £150 personal tax exemption doesn’t apply; the two rules answer different questions and can produce different outcomes for the same event.

How the £150 Exemption Works

Section 264 of the Income Tax (Earnings and Pensions) Act 2003 exempts annual parties and similar functions from being treated as a taxable benefit in kind, as long as the cost per head does not exceed £150.¹ The £150 is a cliff edge, not an allowance. Spend £150.01 per head and the whole amount becomes taxable for every employee who attended, not just the penny over.²

Two other conditions have to hold. The event must be annual and recurring: a Christmas party or summer barbecue held every year qualifies, but a one-off celebration for hitting a sales target or moving offices does not.² And the function must be open to all employees, or all employees at a particular location if the business operates from several sites.¹ A directors-only dinner or a single-department outing loses the exemption.

Working Out the Cost Per Head

Cost per head is the total cost of putting on the event divided by everyone who attends, employees and guests alike. Total cost means VAT, venue hire, food and drink, entertainment, and any transport or overnight accommodation provided so people can get there and home again.¹ Nothing gets stripped out for being incidental.

Counting guests in the divisor can help. If 100 employees each bring a partner, you’re dividing the total by 200 rather than 100, halving the per-head figure. The event still has to be primarily for employees, though. A function where the guest list is overwhelmingly non-staff can be reclassified as general business entertainment, with different tax consequences altogether.

More Than One Event in the Same Tax Year

The £150 exemption applies across all qualifying annual events in a tax year, provided the combined cost per head does not exceed £150 in aggregate.³ A Christmas party at £80 per head and a summer barbecue at £60 per head totals £140, so both stay exempt.

If the combined figure goes over £150, the employer chooses which event to shelter. The sensible move is to exempt the more expensive event and accept a taxable benefit on the cheaper one. Once the exemption is used up on one event or combination, any remaining event is taxable in full for every attendee, not just the amount above the limit.¹

Who Counts as an Employee

HMRC’s definition is wider than most people assume. It extends to retired staff and the partners of current and former employees.⁴ It does not include employees of associated companies or others in the same group, unless the parent incurs the cost and recharges it appropriately to the relevant subsidiary.

Subcontractors and freelance consultants sit outside the definition. Inviting them doesn’t stop the exemption applying to genuine employees, but the cost attributable to non-staff attendees can complicate the VAT position.

The Corporation Tax Deduction Runs Separately

Client entertainment is disallowed as a corporation tax deduction under section 1298 of the Corporation Tax Act 2009.⁵ Staff entertainment gets a statutory carve-out: the general prohibition doesn’t apply to expenses incurred entertaining employees, and the deduction remains available where the spending is wholly and exclusively for the purposes of the trade.⁴

This is the point where the two rules diverge. The corporation tax deduction doesn’t depend on the £150 per head figure at all. A company that spends £200 per head on its Christmas party still deducts the full cost from taxable profits, even though every attending employee faces a personal tax charge on the benefit. Corporation tax looks at business purpose; the £150 rule looks at per-head spend.

Two things narrow this. Where employees are acting as hosts for non-staff guests at a mixed event, the costs attributable to those guests are treated as client entertainment and disallowed.⁴ HMRC also watches for hospitality that is disproportionate to any genuine business purpose. Excessive spending can be recharacterised as disguised remuneration rather than a legitimate trade expense.

VAT Recovery on the Same Event

Input VAT on staff entertaining is recoverable, but only the portion attributable to employees. VAT on the guests’ share is blocked under the business entertainment rules. If an event splits roughly half and half between employees and guests, only about 50% of the input tax is recoverable.⁶

Where employees are hosting clients or other non-staff, the whole cost is treated as business entertainment of the non-employees and input tax is blocked in full.⁶ The exception is overseas customers, where input tax is not blocked, although output tax may then be due. A clear headcount at each event is what makes the apportionment defensible.

When the Exemption Fails

If any of the three conditions is missed, whether cost per head over £150, the event not being annual, or attendance restricted, the full value of the benefit becomes taxable for every employee who attended. That includes any transport or accommodation provided alongside.²

Employees pay income tax on the benefit at their marginal rate of 20%, 40%, or 45%. The employer reports the benefit and pays Class 1A National Insurance on it. Reporting has traditionally been done on Form P11D after the end of the tax year.⁷ From April 2026, most benefits in kind must be reported and taxed through payroll software in real time, with P11D forms remaining available only for employment-related loans and accommodation.⁸ Employers who haven’t set up payrolling of benefits should be preparing for that switch. Late or incorrect reporting attracts penalties of up to £300 per form, with continuing daily penalties of up to £60 if the failure isn’t remedied.⁹

PAYE Settlement Agreements

Most employers prefer to absorb the tax hit rather than hand staff a bill for attending the Christmas party. A PAYE Settlement Agreement lets the employer pay the income tax and National Insurance on the employees’ behalf in a single annual payment, provided the benefit is minor, irregular, or impracticable to allocate to individuals.¹⁰ Social functions typically fit that description.

The cost is higher than the employees’ own combined tax bills would have been, because the figures are grossed up: the company effectively pays tax on the tax. Applications must reach HMRC before 6 July after the end of the relevant tax year, and the tax and NIC payment is due by 22 October where paying electronically. Miss either deadline and the PSA route closes; the benefit then has to be reported through payroll or P11D.

Trivial Benefits as a Fallback

Small gestures outside a formal annual party can qualify separately as trivial benefits. A benefit qualifies if it costs £50 or less including VAT, isn’t cash or a cash voucher, isn’t a reward for performance, and isn’t provided under a salary sacrifice arrangement or in the employment contract. A birthday store voucher, a meal out for a small team, or tickets to a local event can all fit. There’s no annual cap for most employees, though directors of close companies face a £300 annual cap that includes benefits given to their family or household.¹¹ Trivial benefits don’t need to be reported on a P11D or through payroll.

Records to Keep

Both the corporation tax deduction and the personal tax exemption depend on being able to show business purpose, who attended, and what it cost. For every staff event, keep:

Invoices and receipts for every cost that went into the event, including venue, catering, entertainment, transport, and accommodation, each showing supplier, date, service, and VAT breakdown.
An attendee list distinguishing employees from guests, which drives the cost-per-head figure and the VAT apportionment.
A copy of the invitation or internal communication showing the event was offered broadly, not just to senior staff.
A written cost-per-head calculation kept on file rather than reconstructed later.

If the £150 threshold is breached, hold the records supporting the benefit-in-kind reporting too, whether that runs through payroll or a PSA. For a business with hundreds of employees, per-form penalties add up quickly, and the records are what stand between a routine HMRC review and an unexpected bill.

1
legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 264 – Annual parties and functions
2
HM Revenue & Customs. Employment Income Manual – Particular benefits: annual parties and other social functions
3
GOV.UK. Expenses and benefits: social functions and parties – What’s exempt
4
GOV.UK. BIM45033 – Specific deductions: entertainment: exceptions: entertainment of employees
5
legislation.gov.uk. Corporation Tax Act 2009 – Section 1298 – Business entertainment and gifts
6
GOV.UK. VAT Input Tax: Specific issues: staff entertainment
7
GOV.UK. Expenses and Benefits: Entertainment: What to Report and Pay
8
GOV.UK. Confirming plans to mandate the reporting of benefits in kind via payroll software from April 2026
9
GOV.UK. EM4901 – Penalties: Information Returns: Failure to Provide
10
GOV.UK. PAYE Settlement Agreements: What’s included
11
GOV.UK. Tax on trivial benefits