Is your staff Christmas party tax deductible? Our guide to festive tax considerations

19th November 2019

With the festive period approaching, your business may be planning staff parties and celebrations and providing gifts to your workforce. Your staff Christmas party may be tax deductible but you should be aware of any tax implications to avoid an unexpected gift in the form of an additional tax bill! 

Is your staff christmas party tax deductible

Is your staff Christmas party tax deductible?

Yearly events such as the Christmas part are deductible for tax purposes, providing:

  • They are available to all employees and;
  • all events do not cost the business more than £150 per head in total 

If above criteria not met, taxable benefit arises for each employee who attends – and this can become expensive for the business.

If you hold multiple annual events, they must all fall within the £150 total. For example, if you hold a Christmas party costing £75 per head and an annual Summer barbecue costing £25 per person, both events would be tax free as they do not exceed the £150 limit.

To calculate the cost per head, HMRC states that you should divide the total cost of each function by the total number of people who attend, including non-employees (e.g. partners). It’s also important to remember than the £150 amount includes everything involves with delivering the event, including any transport/accommodation costs, as well as food, drink and entertainment.

If the party or event falls outside of the criteria, the whole cost of the function is taxable – not just the amount over £150. So if the barbecue cost £125 but the Christmas party cost £50, the second event (i.e. the Christmas party) would be fully taxable as it takes the total over £150.

However, it may still be possible to take this as tax free if it can be classed as a trivial benefit.

Trivial benefits

Trivial benefits are gifts to employees that fall under the following criteria:

  • Cost the company £50 or less to provide (including VAT)
  • Isn’t cash or a cash voucher (shopping vouchers are permitted)
  • Isn’t a reward for their performance
  • Isn’t detailed in their employment contract

This means that if an event costs up to £50 and falls within the above criteria the staff Christmas party in our example can be tax deductible as a trivial benefit.

What about Christmas gifts for employees?

Any Christmas gifts you provide for your employees must fall under the criteria for trivial benefits in order to be tax free. So if you provide each employee with a £25 food hamper and £20 store voucher, these can be classed as trivial benefits and are tax free.

Remember that there is an annual limit of £300 per employee for trivial benefits so it’s important to keep a record of what you have already provided. For example, if you give an employee a £50 food hamper and £20 store voucher as separate gifts they will still qualify as the total does not exceed £300.

There are special rules for directors – they can receive up to £300 in trivial benefits each tax year.

HMRC provides additional guidance and examples for what can be classed as a trivial benefit here.

What happens if the benefit is taxable?

If a party or gift fails to meet the above exemptions, the benefit becomes taxable.

As an employer you have two options:

  • Issuing a P11D form to each employee affected. Each employee will be liable for income tax at their marginal rate on the whole cost of the party/gift (not just excess over £150/£50) – an option that is unlikely to be very popular with your staff!
  • Agreeing with HMRC to cover the tax and National Insurance due via a PAYE Settlement Agreement (PSA). You will be liable for Class 1A NICs at 13.8% on whole cost of benefit, in addition to Class 1B NICs in respect of tax paid on behalf of employees. Obviously this will increase the cost of the event to the business.

Talk to the experts

Our expert team is happy to review any gifts or functions our clients are planning to provide to their staff to ensure an unexpected tax cost does not arise. Please contact us if you would like to discuss this.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.