The Christmas Party & Tax


I am often asked what the potential tax implications are to throwing a Christmas party for employees.

This question needs considering from two angles.  The first is whether the cost would be an allowable expense for business tax purposes, the other being whether it would be a benefit, taxable on the employees via their P11Ds.  Whilst there is a “general rule” answer to both of these queries, there are a number of pitfalls to beware of, so I shall cover each question in some detail.

Are Christmas parties an allowable expense for business tax purposes?

The general rule is that the cost of staff entertaining is tax allowable, as long as it is not incidental to the entertaining of others.  If you were to invite your suppliers and/or customers to attend too, careful consideration would need to be taken when apportioning the costs pertaining to staff entertaining and supplier/customer entertaining, as the latter is not tax allowable.

Are Christmas parties taxable on my employees as a benefit?

This area has a lot more potential problems to look out for!

The general rule is that the party is not a benefit, so long as it is an annual event, open to all staff and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT) per head.  Now let’s break that down and cover the potential pitfalls.

Our Christmas party this year has come in at £160 per head (taking into account employees and guests).  What should I do?

Essentially you have two options here.

  1. The cost of the Christmas party attributable to each staff member, will need including on their P11Ds (ie £320 if the staff member brought his wife along).  This will result in them paying tax on this amount as if it were normal employment earnings, which is likely to be unpopular with staff.  The business will also be liable to pay 13.8% employer’s national insurance on the total benefit cost.
  2. As an employer, you can agree with HMRC that you will cover the tax and national insurance by way of a PAYE Settlement Agreement (PSA).  This will obviously increase the cost of the party to you as a business.

It is clear, that this subject is not as clear cut as many people believe, and there are many issues to be aware of.