Showing you appreciate your employees at Christmas time is a lovely gesture. Landing them, or the business with an unexpected tax bill, is not so festive!
The rules about what is and isn’t tax free, are a headache. And, for many businesses, December is busy enough without wondering whether the turkey hamper counts as a benefit in kind. So, we’ve pulled together all the rules and potential slip ups you need to be aware of, in one place.
The rules below are correct for the 2026/27 tax year. HMRC hasn’t changed either limit for years, so if you’ve done this before, the numbers will look familiar.
Grab a mince pie and enjoy.
The £150 Christmas party rule
Your annual party is tax-free if it costs £150 or less per head, happens every year and is open to all your staff. HMRC calls this the annual parties and functions exemption, and it’s one of the most generous breaks an employer gets.
To work out the cost per head:
- Add up everything, including the venue, food, drink, entertainment and any taxis home or hotel rooms you lay on.
- Include VAT, even if you can claim it back.
- Divide the total by the number of people who attend, including partners and guests.
The £150 works like a cliff edge. If the party costs £151 a head, the whole £151 becomes a taxable benefit for every employee who went. That’s a pricey extra round at the bar.
A few more things trip people up.
- One-off events don’t qualify. A launch party or a do to celebrate hitting a target isn’t annual, so the exemption won’t cover it.
- The £150 is a yearly pot shared by all your annual events. A £60-a-head summer barbecue and a £100-a-head Christmas do add up to £160, so only one of them can be exempt. Exempt the pricier one and pay tax on the other.
- Separate parties for different offices or teams still qualify, as long as every employee can go to one of them.
- Virtual parties count too. HMRC treats an online party the same way, including any food and drink hampers you send out for it.
Christmas gifts and the £50 rule
A Christmas gift is tax-free under the trivial benefits exemption if it ticks all four boxes.
- It costs you £50 or less per employee, VAT included.
- It isn’t cash or a cash voucher.
- It isn’t a reward for work or performance.
- It isn’t written into their contract or offered through salary sacrifice.
Tick all four and there’s no tax, no National Insurance and nothing to report to HMRC. You won’t need a P11D (the annual benefits form) or any other paperwork.
A bottle of wine, a box of chocolates, a turkey, a hamper or a store gift card all fit the bill. Go for something festive that says thanks for the year.
The £50 limit has the same cliff edge as the party rule. Spend £55 on a gift and the full £55 is taxable. Splitting a £100 hamper into 2 deliveries won’t turn it into 2 trivial benefits either, and HMRC is wise to that one.
Most staff have no annual cap. You can give the same person several trivial gifts across the year, say a Christmas hamper, a birthday cake and flowers when they’re poorly, as long as each one stands on its own and costs £50 or less.
Directors of small companies do have a cap. If you’re a director of a close company (broadly, a company controlled by 5 or fewer people), your trivial benefits are capped at £300 a tax year. That cap also covers gifts to your family members who don’t work for the business. Spend your hamper allowance wisely.
Vouchers, hampers and cash
Whether a gift is tax-free usually comes down to whether your employee could swap it for cash. Use this table for a quick sort.
| Gift | Tax-free? | Why |
| Hamper, wine, chocolates or a turkey (£50 or less) | Yes | A classic trivial benefit |
| Store gift card or voucher (£50 or less) | Yes | It can only be spent on goods, so it can’t become cash |
| Christmas party, including hampers sent for a virtual party | Yes, up to £150 a head | Covered by the annual parties exemption |
| Any gift over £50 | No | The whole value is taxable |
| Cash or a cash bonus | No | Always taxed through payroll, like normal pay |
| Voucher that can be cashed in | No | HMRC treats it as cash |
| Gift given “for a great year’s work” | No | It’s linked to performance, so it counts as a reward |
HMRC treats a cash Christmas bonus as pay. It goes through payroll with tax and National Insurance like any other earnings, so budget for employer’s National Insurance on top.
Mind the message on the card too. “Merry Christmas from all of us” keeps a gift trivial. “Thanks for smashing your Q3 targets” links it to performance and makes it a taxable reward.
Gone over the limit? A PSA can pick up the tab
If your party or gifts go past the limits, a PAYE Settlement Agreement (PSA) keeps the tax off your team’s payslips. You agree it with HMRC and pay the tax and National Insurance on your staff’s behalf in one annual payment.
Nobody wants a tax bill as a thank-you, so it’s a kind gesture. The cost is grossed up – you pay tax on the tax you’re covering, plus Class 1B National Insurance, so a £200-a-head party can end up costing a fair bit more than £200 a head.
Without a PSA, anything over the limits is a benefit in kind. It goes on a P11D or through payroll, and your staff pay tax on it.
One heads-up for April 2027. From then, payrolling most benefits in kind becomes mandatory, which means taxing them through each pay run instead of reporting them on a P11D after the year ends. Trivial benefits and exempt parties sit outside that regime, so staying within the limits now keeps next year’s admin lighter too.
Your festive checklist
- Party cost per head is £150 or less, with VAT, taxis and hotels included
- Every employee is invited to at least one party
- Other annual events this tax year don’t push the total over £150 a head
- Each gift costs £50 or less
- No cash, and no vouchers that can be swapped for cash
- Gift messages thank people for the year, with no mention of results
- Directors of close companies are under their £300 annual cap
- A PSA is in place for anything that goes over
Payroll, perfected (even at Christmas)
The festive rules look simple until you’re working out cost per head at 11pm. At Ascend, our payroll pros sort the party maths, the gift limits and the PSA paperwork, so you can get back to arguing over the Secret Santa budget.
Got a question about your Christmas plans? Get in touch and we’ll make sure the only thing your team unwraps is a present.
