This article was last updated on 09 December 2024.
With the holiday season now upon us, employers are putting the final plans in place for their annual Christmas party and staff bonuses.
These festivities might be fun, but they can be costly to small business owners.
So, you might be wondering: are Christmas party expenses tax deductible and do you pay tax on a Christmas bonus?
Image: ©Shutter2U via canva.com
That's why we’ve put together this simple guide to help you answer these two common questions regarding UK law.
So you can get back to celebrating the holiday season in style!
Are Christmas Party Expenses Tax Deductible?
The short answer is yes, Christmas party expenses are tax deductible in the UK. However, there are certain conditions which must be met.
According to UK law, for your Christmas party to qualify as a tax-free benefit, it must:
Be open to all your employees
Be an annual event
Cost £150 or less per person
Not only do these conditions apply to in-person parties, but online or virtual events too.
Tax Regulations for Christmas Company Events
So, what exactly do these conditions mean?
They may sound straightforward, but there’s a little more to keep in mind for your Christmas party.
The total cost per head must not exceed £150, including
Food and drink,
Transport,
Accommodation,
Etc.
If your total comes out to £150.01 per attendee, for example, you’ve exceeded the threshold and won’t be eligible for tax deductions.
How to Calculate the Cost per Person
To calculate the cost per person, you should divide the total cost of the party by the number of people who attended, including any guests such as spouses.
This amount isn’t just applicable to your Christmas party either but is a total figure for all events held throughout the tax year that you wish to claim.
If you hold an annual Summer BBQ for all of your employees, for example, along with the end-of-year Christmas party, then the tax-free quota reduces to £75 per person at each of these events.
Finally, your business employees – not clients – must be the number one reason for throwing your annual Christmas party. Otherwise, you won’t be eligible for the tax deductions.
What if a Company Hosts Multiple Christmas Parties?
If you run a large company split across multiple locations, you may be wondering if your separate Christmas parties can qualify as a tax-free benefit.
An annual function that’s open to the entirety of your staff based at one location still counts as exempt.
You can also put on separate parties for different departments, as long as all of your employees can attend one of these.
Can Employees Contribute to Lowering the Per-Person Cost?
Sadly, the answer is no.
A £155 per-person workplace Christmas party, for example, is a taxable benefit.
Even if you ask employees to contribute £10 each, the benefit is still taxed, as it is more than the allowable £150 per head.
Image: ©Shutter2U via canva.com
What Christmas Expenses Can a Business Claim?
Once you've determined your tax status and spending restrictions, you can focus on what particular Christmas costs you can claim.
The following are the most important aspects to consider:
Transportation required to and from the event,
Accommodation, if the Christmas event is held in a location that requires staff to stay overnight,
Food and drink purchased for the event,
Entertainment costs, such as live music or other performances,
VAT, if eligible,
Are Virtual Christmas Events Tax-Deductible?
The short answer is yes, you can still create a festive mood virtually while obtaining the deduction.
Virtual Christmas events are becoming more and more popular these days, especially with remote teams.
You could hire entertainment to share via live stream or send food and drink hampers to staff to enjoy during the celebration.
As long as you follow HMRC requirements, the expenses are covered.
Do You Have To Pay Tax on a Christmas Bonus?
Yes, Christmas cash bonuses are counted as earnings and are taxed as salary and wages.
Employers must therefore add the value of the Christmas bonus to their employees’ other earnings, then deduct and pay PAYE tax and Class 1 National Insurance through their payroll.
Image: ©Shutter2U via canva.com
Do You Pay Tax When Giving Goods as Employee Christmas Gifts?
When you give goods as Christmas gifts, different rules apply.
Christmas gifts are usually deemed a ‘trivial benefit’ that’s excluded from tax rules (i.e., one which is small and connected to an employee’s welfare).
So, if you reward your staff at Christmas with goods instead of cash, you must pay class 1A national insurance on the value of the bonus and report it on form P11D, which deals with expenses and benefits.
How ExpenseIn Can Help You Stay on Top of Your Expenses This Christmas Season
ExpenseIn is an all-in-one expense management software which can make tracking your Christmas party expenses easier than ever.
With features like receipt scanning, you can simply take a photo of your receipt with the app and let it automatically extract the required information.
If staff members are in charge of shopping for your company’s annual festivities, you can also set up automated policies within the business expense tracker app to boost policy compliance and reduce overspending.
ExpenseIn’s real-time reporting also lets you track Christmas event expenditures as they happen, allowing you to keep on top of these expenses and make sure your company remains within the regulations set out by the HMRC to qualify as a tax-free benefit.
ExpenseIn can also be used all year round. The app brings everything you need to create, approve, and report on expenses into one easy-to-use package.
Interested in learning more? Book a free demo today!
