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The Christmas Party Allowance Myth

Staff parties have no limits. Or do they? There are many misconceptions about the party allowance that employers and employees receive. It’s time to debunk these myths before the festive season comes upon us. Be mindful of the financial implications that might apply to you, your business or your team.

Annual party allowances: not just for Christmas

Companies are entitled to receive an annual tax-free party allowance. Despite Christmas parties being the most popular type of annual staff party, it is not the only type of party that is covered under the annual staff party tax allowance. The allowance does not correlate to the time, or location of the party/event, but instead the total spend and other conditions.

What are the conditions?

The allowance can be used on multiple events such as a summer barbecue or social event as long as the total is below the limit. In order for the party to considered a tax-free benefit, it needs to meet the below conditions defined by HMRC:

  • Each year a business has a cost limit of £150 per head. If the annual cost per head is over £150 then the whole event will be taxable. It is better to think about this as a limit rather than an allowance.
  • The event is open to all employees
  • The events are annual events
  • The total cost per head may take into account expenses relating to the event, i.e. transport to the venue and accommodation as part of the event

Calculating your allowance

Say at Christmas you host a staff party that costs £100 per head, then at summer you host a party that costs £45 per head. This would total £145 per head for both events. Since it is below the £150 limit per employee, the total amount for both parties is tax-free, despite it being split across two separate occasions.

If the Christmas event alone was within the £150 per head limit, then you would simply use the allowance for this event that year.

Having more than one party a year

If the summer party had cost £60, the total for both parties would have been £160 per head. This means that it would have been taxable since it exceeded the £150 per head limit. If this is the case, it would be more beneficial to use the £150 per head allowance on the more expensive party - the Christmas party at £100 per head. If the Christmas party alone was £160 per head, then the whole event would become taxable.

Exceeding the limit

If the annual party costs in total exceed £150, businesses can pay the benefit on behalf of the employees (rather than getting employees to pay it themselves). These are called PAYE settlement agreements (PSA) and are part of the Benefit in Kind process. This would be an extra expense to the business. However, we can’t imagine that getting employees to pay tax on attending their annual staff Christmas party would be popular or great for morale.

Making use of the trivial benefits

Other than the annual staff parties, there are other ways to treat your staff well for their hard work, whilst receiving tax exemptions on them. Read more about the ‘fun’ trivial benefits that you might be able to make use of in our other blog.

Worried about treading the line?

If you are unsure about whether your annual events will be taxable or not, always be sure to ask your accountant.

We help clients with their financial matters every day. Get in touch if you have any questions. Email us at Enable JavaScript to view protected content. or phone us on 0131 364 4191.

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