Think you’re treating your team to a well-deserved Christmas celebration? What may be intended as a treat and acknowledgement of your team’s hard work could actually be gifting yourself and your employees an unwanted tax bill!
Here’s what every UK business owner needs to know about the infamous £150 party exemption.
The not-so-generous £150 rule
HMRC’s £150 per-head exemption for annual parties seems straightforward – until you look closer. This isn’t an allowance; it’s an ‘all-or-nothing’ exemption. Go £1 over, and the entire amount becomes a taxable benefit. Yes, you read that right – the whole amount, not just the excess.
How easy is it to get wrong?
The answer is frighteningly easy. Here’s a real scenario I encountered.
A company with 50 staff planned a £145 per-head event. They knew about the £150 a head rule and were confident that they were within the rules.
But on the night, several unexpected charges blew their carefully laid plans out of the water;
- The venue applied a last-minute venue corkage fee: +£3
- Unexpected taxi arrangements: +£10
- Five people couldn’t attend, spreading costs over fewer heads
This resulted in a final cost per head of £168.
The Tax Sting
Here’s where it gets painful. That £18 overspend triggered costly implications for the business and employees.
For the business
- Class 1A NICs on the entire £168 per person
- Additional P11D reporting requirements
- Potential penalties for late or incorrect reporting
- The full amount becomes disallowable for Corporation Tax
For the employees
- The entire £168 becomes a benefit in kind
- Higher-rate taxpayers could face a £67.20 tax bill each
- Impacts their tax codes and potential income-related benefits
- Could affect pension contributions and salary sacrifice arrangements
The Hidden Multiplier Effect
Remember, these costs multiply across your workforce. For a 50-person business, that seemingly innocent £18 overspend could result in:
- Over £3,000 in additional employee tax liability
- £1,160 in employer NICs
- Hours of additional payroll administration
- Potential HMRC scrutiny of other benefits
Three Common Pitfalls
In my years working in payroll and tax, there are some common pitfalls I have seen employers fall into
- The ‘last orders’ trap
That end-of-night round of drinks could push you over the limit. Always include a buffer in your budget.
- The ‘plus one’ problem
Partners count in the headcount but not the multiplication. A £140 per head party becomes £280 when partners attend.
- The ‘extra mile’ error
Trying to be generous by paying for taxis home? Those transport costs count toward your £150 limit.
Protect Your Business
As with all tax scenarios, prevention is cheaper than cure. When planning your ‘Christmas Do’, think about the following;
- Build in a 10% buffer below the £150 threshold
- Consider splitting events across the year
- Keep meticulous records of all costs
- Monitor attendance changes and recalculate accordingly
Don’t Get Caught Out
This December, many UK businesses will inadvertently create tax liabilities that far outweigh the goodwill generated by their celebrations. Don’t let yours be one of them.
Need Help?
If you’re planning your company Christmas celebration or worried about previous events, our Head of Compliance, Paul Chappell, specialises in helping business owners navigate these tricky waters. With over 20 years of experience in tax and compliance, Paul can ensure your festive celebrations don’t come with an unwanted tax hangover.
