We're approaching that time of year again when employees dream of showing off their best dance moves in front of colleagues at the annual Christmas party.

COVID-19 ensures there's an ethical dilemma for most employers in 2021, some of whom might hold genuine concerns that the traditional office party could become a super-spreading conduit for the virus.

Hospitality firms, already hammered by the pandemic, wait with baited breath to see if employers honour optimistic pledges made earlier in the year, or leave it to the last minute to make a final decision on their plans.

Others might insist on members of staff taking a PCR test in advance of the party before confirming their attendance to try and ensure they won't lead to COVID-related sickness and absence in the new year.

Whether your business is pressing ahead with holding its first face-to-face Christmas party since December 2019 or you're going down the online/virtual route for the second consecutive year, HMRC can help.

The annual party exemption

Employers can spend up to £150 per staff member on an annual Christmas party without needing to notify the tax authority, due to the rules on expenses and benefits: social functions and parties.

Virtual parties, including gifts for consumption at the party, also qualify. So, you could provide all employees with a festive hamper containing some food and drink to enjoy while the online function takes place - as long as the total cost per head is within the £150 exemption.

No tax or National Insurance contributions (NICs) are payable on costs up to this amount relating to annual social events for employees, assuming every employee is invited to attend.

If the cost of your party this year exceeds £150 per person (including VAT), you will need to pay tax on the entire event - not just the amount that exceeds £150. This figure is an allowance to be set against an amount that exceeds that figure.

The exemption isn't solely reserved for Christmas parties. It could apply to any annual party or social function, such as a summer barbecue or a trip to an escape room to name but two examples.

There's no expectation or legal obligation for employers to keep records of employees who attend the annual Christmas party, assuming the cost per head does not exceed the £150 cap in 2021/22.

Giving gifts

Christmas is a time for giving and, under HMRC's trivial benefits rule, employers can give members of staff gifts worth up to £50 without being liable for tax.

This cannot be a cash reward, but it could be used for something like a bottle of wine or a box of chocolates worth up to £50 per head, and there's no restriction on using this at the same time as the annual party.

Gifts worth more than £50, such as an expensive hamper or a case of Italian red wine, might have to be reported on the employee's P11D, or included in a PAYE settlement agreement.

Talk to us about business tax planning.

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