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Christmas parties are a great way to reward your employees and celebrate the end of the year.

To make the festive season even sweeter, HMRC provide tax exemptions for limited companies who put on a Christmas party for employees.

Unfortunately, the tax exemption doesn’t apply to sole traders.

There is no specific allowance for a ‘Christmas party’ as such, but HMRC does provide tax relief against the cost of holding an ‘annual event’ (eg: Christmas party or Summer party) if certain conditions are met.

Your Christmas party will be exempt from tax and National insurance if:

  • It is an annual event
  • It does not cost more than £150 (including VAT) per person
  • The party is open to all your employees and consists mostly of employees

It is important to note that shareholders are not included in the exemption if they are not employees or directors.

You may also claim an additional £150 per person for a ‘plus-one’ per employee, as long as they are a family member or partner.

Exemption or allowance?

The HMRC incentive is an exemption, not an allowance.

This means that if your party costs £151 or more per person, you will not be able to claim the first £150 as a business expense. The whole cost will be taxed as normal.

The exemption also spans the whole year, so the combined cost per person of all parties in a single year must not exceed £150.

To calculate the cost per head, HMRC states that you should ‘divide the total cost of each function by the total number of people (including non-employees) who attend’.

How to claim exemption

Simply record the cost of the party as a Staff Entertainment expense and you’re good to go. Remember to scan and upload all receipts and invoices as proof of your Christmas party.