Staff Christmas parties are usually booked in October and November, which is when many employers first ask whether the bill will create a tax charge. The answer depends on two separate rules in the Income Tax (Earnings and Pensions) Act 2003: the annual function exemption in section 264 and the trivial benefits exemption in section 323A. Both are in force now, and HMRC's guidance on GOV.UK describes them in the same terms.
The annual party exemption: £150 per head
Section 264 of ITEPA 2003 covers an annual party or similar annual function provided for an employer's employees, where the function is available to them generally or to those at a particular location. If only one such function is provided in the tax year and its cost per head does not exceed £150, no income tax liability arises on it. GOV.UK's guidance on social functions and parties adds that National Insurance is not due either, provided the same conditions are met.
The official guidance sets out three conditions. The party must be open to all employees, it must be annual, and it must cost £150 or less per person. The guidance also states that the rule applies to online or virtual parties, so a video quiz for a remote team can qualify in the same way as a dinner in a hotel. An employer with several sites can hold separate events for each location, and separate events for different departments, as long as every employee can attend one of them.
The cost per head is not just the price of the meal and drinks. Section 264(4) includes any transport or accommodation provided for people attending, including guests who are not employees, and section 264(5) counts VAT on the expenses. The total is then divided by the number of people attending. A venue quote of £140 per head can therefore exceed £150 once a coach and a few hotel rooms are added, which is a common way for the limit to be breached without anyone noticing.
More than one event in the same year
Employers sometimes hold a summer barbecue as well as a December dinner. Section 264(3) allows more than one annual function in the same tax year. Where two or more are provided, one or more of them can be exempt if their cost per head does not exceed £150 in aggregate. GOV.UK puts it simply: as long as the combined cost of the events is no more than £150 per head, they remain exempt.
The practical consequence is that a £90 per head summer event leaves only £60 of headroom for the winter party. Once the combined figure goes over £150, the exemption is lost for the events that take the total beyond the limit, so the employer should keep a per-head record for each function from the start of the tax year.
What happens above the limit
The exemption is switched on only where the cost per head does not exceed £150. Above that line, the charge is not limited to the excess. The cost of the party per employee becomes a taxable benefit, and it must be reported and paid through the usual route for benefits in kind. For most employers that means a P11D or payroll reporting, with Class 1A National Insurance on the value. The employer should check the position before the event rather than after the invoice arrives, because the rules are applied per head, not on the total spend.
The trivial benefits exemption: £50 for gifts
Many employers also give a small Christmas gift, such as a bottle of wine, a box of chocolates or a voucher from a retailer. These can fall under section 323A of ITEPA 2003, which removes the income tax charge on a trivial benefit that meets four conditions. The benefit must not be cash or a cash voucher. Its cost must not exceed £50. It must not be provided under a salary sacrifice arrangement or any other contractual obligation. And it must not be given in recognition of particular services the employee has performed, or in anticipation of them.
The last condition is the one employers most often overlook. A Christmas hamper given to everyone on the staff list is generally within the rules. The same hamper promised to a sales team for hitting a target is a reward for services, and the trivial benefits exemption does not apply to it. Gift cards are the usual trap: a voucher that can be exchanged for cash, or spent in a way that does not restrict the goods bought, falls within the cash voucher definition in section 75 and cannot use the exemption, even when it is worth £20.
Close companies have an extra limit. Under section 323B, a separate annual cap of £300 applies to trivial benefits provided to directors and other office-holders of a close company, and to members of their families or households. This cap is additional to the £50 per-benefit test, so a director-shareholder receiving several gifts across a year needs to track the total against £300 as well as each individual item.
Where employers slip
- Counting the restaurant bill but not the coach or the overnight rooms, which are part of the per-head cost under section 264(4).
- Forgetting VAT, which section 264(5) includes in the cost, so a quote that looks like £145 per head may already be above the limit.
- Treating a summer event and a winter event as separate allowances, when the £150 limit applies across both in aggregate.
- Giving staff gift cards as a "trivial" benefit, when section 323A(3) excludes cash vouchers.
- Using the trivial benefits exemption to cover a bonus dressed up as a gift, which fails the condition on services.
Employers who run a payroll for a small team can keep a simple spreadsheet with the event date, the total cost, the number of attendees and the cost per head. Adding a column for transport and accommodation takes a few minutes and avoids the most common error.
What is not changing before the Budget
The Chancellor's Autumn Budget is scheduled for 28 October 2026. That event has not yet taken place, and nothing in this article assumes that the Budget will change the party or gift rules. The figures above are the current ones in the legislation and on GOV.UK as of 13 October 2026. Employers planning a December event should check the rules again if they are reading this after the Budget, but the current position is clear: a £150 per head annual party and a £50 non-cash gift are both available, subject to the conditions above.
Anyone who is unsure whether a particular event or gift qualifies can read the GOV.UK guidance on social functions and parties, or ask their payroll adviser before the invitations go out.