QUESTION: After a very challenging year I’m thinking of taking all my staff out for a Christmas party. This will be the first time we have done this as we are a relatively new company, and I am wondering is there anything I need to consider from a tax perspective?
ANSWER: As the festive season approaches, many employers choose to thank their employees with a Christmas party or a special meal.
While such events are a great way to boost morale and recognise the hard work of the team, both employers and employees need to be aware of the tax implications tied to these festive celebrations. Failing to consider the rules could turn a season of goodwill into an unexpected tax headache.
Employers can take advantage of a tax exemption for annual staff parties and events, provided certain criteria are met. The event must be open to all employees, and the cost per head must not exceed £150 per year. This £150 threshold includes VAT and must cover all associated costs, including food, drink, accommodation, and transport.
It’s important to note that this £150 is an annual allowance, not a per-event exemption. If an employer holds multiple events throughout the year (e.g., a summer barbecue and a Christmas party), the total combined cost per employee must not exceed £150. If the cost does exceed this threshold, the entire amount—not just the excess—becomes a taxable benefit.
To calculate whether the event qualifies for the exemption, employers should divide the total cost of the event (including VAT) by the number of attendees. Attendees can include both employees and their guests. For example, if a Christmas party costs £3,000 and 50 people attend (including 10 guests), the cost per head is £60. In this case, the event would fall well within the £150 threshold.
If the cost per head exceeds £150, the entire amount becomes a taxable benefit for employees. Employers must then report the benefit on a P11D form for each affected employee or opt to cover the tax via a PAYE Settlement Agreement (PSA). A PSA simplifies the process by allowing the employer to pay the tax on behalf of the employees, thus sparing staff from any unexpected deductions.
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While the £150 exemption covers the event itself, additional perks such as Christmas gifts may not be tax-free. Employers providing gifts should ensure they meet the criteria for trivial benefits. A trivial benefit, such as a small festive hamper or a bottle of wine, must cost £50 or less, not be cash or a cash voucher, and not be given as a reward for performance. If these conditions are met, no tax or National Insurance contributions are due.
For employees, the good news is that most Christmas parties and events fall under the tax-free exemption. However, if the £150 threshold is exceeded or if non-trivial gifts are provided, employees could face a tax liability. In such cases, they may see the taxable benefit reflected in their tax code, reducing their personal allowance.
Key takeaways for employers
- Plan events carefully to stay within the £150 per head allowance.
- Keep detailed records of all costs and attendees to ensure compliance.
- Use PAYE Settlement Agreements for simpler tax handling if necessary.
By staying informed and proactive, employers can ensure their festive thank-you for employees remain a joyous occasion without unwelcome tax surprises.
Shane Martin (shane.martin@aabgroup.com) is director at AAB Group Accountants (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
