Last updated: 16 October 2026
Are company parties tax-free?
Yes, if they meet HMRC’s annual function exemption. An annual event, such as a Christmas party or summer barbecue, is tax-free for employees if it is open to all staff (or all staff at one location) and costs no more than £150 a head, including VAT, transport and accommodation. The company can deduct the cost for corporation tax and usually reclaim the VAT on the staff portion. If total spending on annual events goes above £150 a head, the whole cost of the event that tips it over becomes a taxable benefit.
The conditions
- The event is annual, not a one-off
- It’s open to all employees, or all at a location
- The cost per head is £150 or less, including VAT
- The cost per head includes guests
How to work out cost per head
Divide the total cost of the event, including VAT, venue, food, drinks, entertainment, transport and accommodation, by the total number of people attending, including guests.
Multiple events
| Events in the year | Cost per head | Taxable? |
| Christmas party | £120 | No |
| Christmas £120 + summer £60 | £180 total | Use exemption on Christmas; summer taxable |
| Christmas £100 + summer £50 | £150 total | No |
If the limit is exceeded
The whole cost of the event that pushes you over £150 becomes taxable. Most employers settle this through a PAYE Settlement Agreement (PSA), paying the tax and NIC for employees, so staff aren’t hit with a bill.
VAT
VAT on staff entertaining can be reclaimed. VAT on the cost of guests who aren’t employees, such as partners, can’t be reclaimed unless you charge them.
Directors
A one-person company with no employees can use the exemption for the director and a partner. It’s tax-free if the conditions are met, but the director should keep records showing it was a genuine staff function.
Example
A company with 20 staff holds a Christmas party, with 30 people including guests. The cost is £3,900 including VAT, or £130 a head. It’s tax-free for staff, deductible for the company, and VAT is reclaimable on the staff share. A summer barbecue costing £40 a head would take the total to £170, so the company treats the barbecue as taxable under a PSA.
Common mistakes
- Forgetting to include VAT and transport
- Treating £150 as an allowance to split across events
- Excluding some staff
- Not counting guests
Records to keep
Keep invoices, attendance lists and calculations of cost per head.
Trivial benefits alongside parties
Small gifts such as a bottle of wine or a hamper at Christmas can be tax-free as trivial benefits if each costs £50 or less, isn’t cash or a cash voucher, and isn’t a reward for work. Directors of close companies are limited to £300 a year. These sit separately from the £150 annual function exemption.
Keep a record of the event
Record the date, total cost and number of attendees so you can show the cost per head is within the limit.
Frequently asked questions
Can virtual parties qualify?
Yes, if conditions are met.
Are gifts at the party included?
Yes, if given to all as part of the event.
What about client entertaining?
That’s separate and not deductible.
Can the £150 be increased?
It has stayed at £150 since 2003.
Related: reporting employee benefits, client entertainment and gifts to staff.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with staff party tax advice. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
