Staff parties and the annual function exemption

If the rules around social functions are followed, staff events like your end-of-year party or your summer barbecue are normally an allowable expense for your company, and your staff have no tax or National Insurance to pay on them.

This means you can get tax relief on the cost of putting on a social event for your team, while also helping to build better team bonds.

Whether your party takes place in the office, at a local restaurant or online for your remote teams, the same HM Revenue & Customs (HMRC) rules apply. Virtual or online events can qualify.

How the annual function exemption works

The annual function exemption means that your employees don’t pay tax or National Insurance contributions (NIC) on the cost of a qualifying annual staff event.

For the company, staff entertaining is normally allowable for Corporation Tax as long as it is wholly and exclusively for the business and not incidental to entertaining customers. The cost is still deductible if the employee exemption doesn’t apply.

So how does the exemption actually work, and what are the specific rules you need to know about?

Is my event eligible?

• The event must be annual and recurring, for example a Christmas party or summer barbecue. A one-off event, such as an anniversary party, doesn’t qualify.
• It must be open to all employees, or to all employees at one location if you have more than one site. A directors-only party doesn’t qualify.
• It should be a structured social event, where food, drink and possibly entertainment are provided.
• There can be separate functions for branches, departments or other office locations, as long as every employee can attend one of them.

What records do I need to keep?

As a company, you’ll need to keep records of who was invited to the social event and who actually attended. You’ll also need to record the costs of putting on the event, including all associated travel and accommodation.

What’s the limit?

The event is exempt if the cost per head is £150 or less, including VAT and any transport or overnight accommodation you provide. Work out the cost per head by dividing the total cost by everyone who attends, including guests. If you hold more than one annual event, the combined cost per head must be £150 or less.

Note: this can’t be disguised client entertaining. Guests must be employees or their partners, not clients or suppliers.

What if it costs more?

£150 is not an allowance. If an event doesn’t qualify, the whole cost per head is a taxable benefit for each employee who attends (plus the cost for any family guests), not just the amount over £150. The cost is normally still an allowable expense for the company. Many employers cover the tax for their staff through a PAYE Settlement Agreement.

How does this work in practice?

If you hold three annual functions costing £70, £60 and £40 per head, you may choose to apply the exemption to the £70 and £60 functions (a total of £130 per head). The balance of £20 (from the £150 limit) is lost, and the £40 function is taxable and subject to National Insurance.

A qualifying event doesn’t need to be reported to HMRC, unless it is provided through a salary sacrifice arrangement.

The annual function exemption is a useful benefit for your company and your staff.

Talk to us about your staff events

Checked on 8 October 2026. The government’s Budget on 28 October 2026 may change some of these rules and rates. Please check with us before acting.

If you’re planning a staff function, talk to us. We can help you check whether it meets the annual function exemption rules and how the costs are treated for tax.

Get in touch if you want to discuss this further, or if you want to arrange to cover any tax and NI for your employees through a PAYE Settlement Agreement. See also our payroll management and Business Tax Advisory services.