Quick Summary
- Staff parties are tax-free up to £150 per head a year, if open to all staff.
- Go over £150 and the whole amount becomes taxable, not just the excess.
- Staff gifts up to £50 can be tax-free trivial benefits — but not cash.
- Directors of small companies are capped at £300 of trivial benefits a year.
- Client gifts are only deductible if they're £50 or less, branded, and not food, drink or vouchers.
Rewarding your team at Christmas is a great idea — and with the right planning it can be completely tax-free for both you and your staff. Get it wrong, though, and you could face an unexpected tax bill. Here are the rules for small businesses.
The staff Christmas party: £150 per head
The annual function exemption lets a business pay for staff events without creating a taxable benefit, as long as:
- The total cost of annual events is £150 or less per head for the tax year (including VAT, food, drinks, transport and accommodation)
- The event is open to all employees (or all at a particular location)
- It's an annual event, such as a Christmas party or summer barbecue — not a one-off
Work out the cost per head by dividing the total cost by everyone who attends, including guests. If you exceed £150, the whole cost becomes a taxable benefit, not just the amount over — so a £160-a-head party is far worse than a £150 one. If you hold two events, you can use the exemption for whichever combination stays within £150.
The cost is an allowable business expense, and VAT on staff entertainment can usually be reclaimed (though not the share for guests who aren't employees).
Staff gifts: trivial benefits
A Christmas gift to staff is tax-free as a trivial benefit if:
- It costs £50 or less per employee
- It isn't cash or a cash voucher (a gift card for a shop is fine; cash isn't)
- It isn't a reward for work or performance
- It isn't in the employee's contract
A turkey, a bottle of wine, a hamper or a £50 shop gift card all usually qualify. A cash Christmas bonus doesn't — it must go through payroll with tax and National Insurance.
Directors of small companies
Directors of close companies (most owner-managed limited companies) and their families can receive trivial benefits too, but they're capped at £300 per tax year in total.
Gifts to clients and customers
Client gifts are only an allowable business expense if:
- They cost £50 or less per person per year
- They carry a clear advert for your business, such as a branded diary or mug
- They're not food, drink, tobacco or vouchers
That means the traditional bottle of whisky for a client usually isn't deductible. Client entertaining — such as taking a customer for a Christmas meal — isn't deductible either, and you can't reclaim the VAT on it.
Sole traders
If you're a sole trader with no staff, a Christmas meal for yourself isn't a business expense. If you employ people, staff parties and gifts follow the rules above, and the costs are allowable.
Quick checklist
- Party: £150 per head or less, open to all staff
- Gifts: £50 or less, not cash, not a reward for work
- Directors: within the £300 annual cap
- Clients: branded, £50 or less, not food or drink
- Bonuses: through payroll
Frequently Asked Questions
How much can a business spend on a Christmas party tax-free?
Up to £150 per head per tax year across annual staff events, including VAT, travel and accommodation, as long as the event is open to all employees.
What happens if the Christmas party costs more than £150 per head?
The whole cost becomes a taxable benefit for attendees, not just the amount over £150. Many businesses then settle the tax through a PAYE Settlement Agreement.
Are Christmas gifts to staff taxable?
Not if they qualify as trivial benefits: £50 or less, not cash or a cash voucher, not a reward for work and not contractual.
Can company directors get tax-free gifts?
Yes, as trivial benefits, but directors of close companies are limited to £300 of trivial benefits per tax year.
Are client Christmas gifts tax deductible?
Only if each gift costs £50 or less per person per year, carries a clear advert for your business, and isn't food, drink, tobacco or vouchers.
Planning Staff Rewards This Christmas?
We'll check your party and gift plans stay tax-free and put any bonuses through payroll correctly.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice in Govanhill, Glasgow. He works with sole traders, tradespeople, landlords and small limited companies across Glasgow and Clydebank.
This guide is general information based on UK and Scottish tax rules as at 13 October 2026. It is not personal advice. Rates and thresholds change, so speak to us about your own situation.