Providing staff with an annual Christmas party could give an unwelcome tax headache due to outdated allowances
For annual parties and other social functions open to all staff generally, there is a tax exemption that allows up to £150 in total per head (including VAT) to be spent each tax year on annual staff functions without the employee incurring a tax liability.
The exemption, which is often used to cover events like the annual Christmas party or summer barbecue, is an all or nothing exemption. If an event is not covered by the exemption, the total cost is taxable, not just the excess above the exempt amount. So spending just £1 more than the £150 per head means that it is taxable in full.
Where costs are not covered by the exemption, the employee will need to pay tax on the full amount unless the employer enters into a PAYE Settlement Agreement with HMRC to do so on their behalf.
What’s the issue?
The exemption has remained at £150 per head since 6 April 2003, and employers frequently find this is insufficient to cover the cost of (say) a Christmas party for staff, especially in London and other more expensive parts of the country. Had the exemption been increased in line with inflation, this would have been £280 at the start of the 2026/27 tax year.
Research shows many firms are now exceeding the exemption, spending up to £170 per person for their festive gatherings.
Why it matters
By not increasing the £150 exemption, more annual functions will be taxable over time, resulting in additional compliance and tax costs for employers. It could also encourage them to reduce or scale down the functions provided. If fewer functions were being held, this could have wider economic impacts, including a reduction in activity for the already struggling hospitality sector.