As the holiday season unfolds, directors of limited companies have a unique opportunity to leverage the tax incentives offered by HMRC for their annual office Christmas parties.

In this comprehensive guide, we will explore the intricate details of the annual Christmas party allowance, providing directors with a nuanced understanding of the conditions and rules involved.

Annual Christmas party allowance rules

To qualify for HMRC’s tax relief, directors must ensure that their Christmas party meets specific criteria.

The event must be wholly and exclusively for business purposes, necessitating that it is an annual occurrence rather than a one-off celebration.

Eligible events include the likes of a yearly summer celebration or a traditional Christmas party.

Moreover, the event must be open to all company staff, with most attendees being employees; shareholders are excluded unless they also serve as employees or directors.

A further critical aspect of securing tax relief is adhering to the cost limitation.

The Christmas party’s cost per person, inclusive of VAT, should not exceed £150. This budget encompasses various elements, including food, drink, transport, overnight accommodation, and overall event expenses.

Directors can claim an additional £150 per head for a plus one, provided the plus one is a spouse or family member, adding a personal touch to the celebration.

Exemption or allowance?

It is crucial to note that Christmas party costs fall under the category of exemption rather than an allowance.

Consequently, remember that the expenses associated with the celebration do not surpass the £150 per person threshold set by HMRC.

Should the expenditure exceed this limit per person, the entire amount, including the initial £150, becomes subject to taxation and National Insurance. This necessitates recording the excess on your PAYE Settlement Agreement (PSA).

Furthermore, the £150 cost per person exemption extends throughout the entire year.

In the event of hosting other staff annual events, such as a yearly summer party, it is essential to adhere to the overarching rule that the combined cost per person attending all functions throughout the year must not surpass £150.

This comprehensive approach ensures compliance with HMRC regulations and safeguards against potential tax and National Insurance liabilities.

Virtual Christmas parties

In the context of the evolving work landscape brought about by the pandemic, virtual Christmas parties have become increasingly prevalent.

While these virtual gatherings are considered allowable expenses, directors face additional considerations.

For instance, providing evidence to HMRC proving attendee participation is essential to qualify for the annual function exemption.

Given the virtual setting, providing meals and drinks within the £150 per person cost may pose challenges.

A practical solution is to send Christmas party hampers to employees, ensuring they enjoy the event while staying within the allocated budget.

However, if you decide to opt for this, make sure you don’t forget to hold the event entirely and just send the hampers alone!

This is because a hamper without a party does not qualify for the exemption. Gifts sent on their own without the accompanied organised event would be allowable under different conditions – possibly trivial benefit rules.

Does the relief apply for sole directors?

Sole directors, not exempt from these considerations, can claim the Christmas party allowance for themselves and a plus one, provided they adhere to HMRC rules.

Seeking expert guidance is advisable to navigate potential tax and National Insurance pitfalls, ensuring a seamless celebration.

Recovering expenses

In order to recover your Christmas party expenses, you simply need to record your party costs as a tax-deductible expense when computing your taxable profits.

Assuming you have met all the necessary conditions, it will reduce the corporation tax you will pay at the end of the tax year. Furthermore, the party will also be exempt from tax and National Insurance.

Claiming VAT

For directors keen on reclaiming VAT for Christmas party costs, attending the event with employees is crucial.

However, VAT is not reclaimable if only directors and their partners are present, emphasising the importance of aligning expenses with business purposes.


To sum up, meticulous attention to HMRC’s guidelines is imperative when planning to claim tax relief for your office Christmas party.

Limited companies can benefit from the annual allowance, with flexibility to split the £150 exemption across multiple allowable events throughout the year.

For further queries and expert guidance on claiming tax expense relief, we can help. We would encourage directors to contact our professionals who are well-versed in HMRC regulations.

Celebrate the season while maximising the tax advantages available to your limited company, creating a festive and financially savvy atmosphere for all.

Contact us today for more information.