£150 per head for annual functions
Annual : meaning that it must be an event that happens every year. If you don’t generally have a Christmas party but decide to say celebrate 10 years in business then this would not satisfy the rules of the exemption.
£150 per head : The exemption only applies if the cost per head is not more than £150. It is important to appreciate that this is a limit and not an allowance. Meaning that if say the cost per head was £148 then the full amount would be tax free, but if the cost per head was say £152 then there is no exemption and the full amount is taxable (not just the £2). This is important to stress and be wary of because going slightly over the limit can make a huge difference and quickly become very expensive.
The cost per head is simply the total cost of:
- the party or function; and
- any transport or accommodation provided
divided by the number of persons attending
More than one annual function
The £150 limit can be used to shelter more than one annual function but they must be offset in full. There is no scope to partially offset and any unused balance is lost. Meaning if you have two annual functions which come to a total of say £135 then they are both exempt but if there was also a third which cost say £50 per head then you could not partially offset the £15 remaining within the £150 limit. The £15 is lost an that third function is taxable in full.
n.b. as stressed above functions must be annual and one-off functions will be taxable
The good : Guests come into your calculation for cost per head, and the more people you have the more likely it is that the cost per head will be below the £150 limit.
The bad : If the function is not exempt then the employee is taxed on the cost of both their own attendance and that of their guest. So a higher rate tax payer with a guest that attends an annual Christmas party with a cost per head of £152 could end up with a tax liability of £121.60 (40% x £304). There would also be the Class 1A NI to be paid by the employer.