Employers may cover the cost of certain social events for staff without creating a tax liability, thanks to a statutory exemption provided certain conditions are met. This used to be a concession but is now enshrined in law.

The exemption applies to an “annual party or similar function” as long as it is available to all employees or generally to those at a particular location. During the Covid-19 pandemic, HMRC confirmed that a ‘function’ could include a virtual party, where employers were unable to host a traditional party with employees physically present.

A key condition is that the cost per head of the party or function must not exceed £150, inclusive of VAT. If an event costs more than £150 per head, it becomes fully taxable, not just on the excess over £150.

If you have already held a Christmas party for staff, it may be possible to hold another event and also have it exempt from tax, provided the combined cost per head does not exceed £150 for the year. If the combined cost exceeds £150, the employer can designate which events should be accounted for to make the best use of the exemption. For example, if the cost per head of the Christmas party was £100 and the summer event was £70, the employer can nominate the Christmas party to be covered by the exemption, but the £70 summer event would be taxable (not just the excess £20).

Instead of the employee being taxed on the £70, the employer can handle the tax and national insurance on the employees’ behalf through a PAYE settlement agreement.