If you are throwing a Christmas party or corporate event you can qualify for a tax exemption. Here are a few tips on how to maximise the tax exemption if you are going to have one or more events throughout the year for employees and/or guests.

According to the Government act s.264 Income Tax Employment and Pensions Act you can receive a tax exemption for an annual Christmas party or event that is held for employees. You can receive the tax exemption as long as the cost per head is no more than £150. You can work out the cost per head for an event by taking the total cost of the event (including catering, entertainment, transport, venue hire, decorations, alcohol and any accommodation) and dividing it by the number of employees and guests attending. For instance, if your event costs £6,000 and you have 40 people attending then the cost per head will be £150.

Turn the equation the other way to work out what your maximum tax-free budget can be: 20 employees at £150 per head = £3,000. But each of those employees might bring a guest putting your total head count up to 40 (doubling the number of people attending). So, then your tax-free event budget becomes 40 x £150 = £6,000. The importance of this equation is to make sure that your cost per head does not go over the tax exemption limit for each attendee.

The catch is that the £150 tax-exemption limit for each person attending is not an allowance. If your cost per head figure for the whole year is more than £150 then you will be taxed on the whole amount (not just the surplus amount). This is for directors and P11D employees. P9D employees are not eligible to have their event cost tax exempted. The total cost of the attending employees added to the cost of a guest coming will be the cash equivalent of the benefit.

If you are having more than one event during the tax year and if the cost per head of the event(s) that is exempt does not go over the £150 limit in aggregate then there will be no liability for the events.

You need to take into account the number of guests that attended the event(s) as well as the number of employees, for two or more events in the tax year not just the cost per head. If you exceed the £150 tax exemption limit then the employees that brought guests is also looked at.

For example a local business holds three functions during the tax year – a formal ball at £100 per head, a race evening with supper for £30 per head and a Christmas party for £60 per head. Only the formal ball involved employees being allowed to bring guests. So as the owner/accountant of the business you need to decide which event should utilise the tax exemption. Initially it seems the Christmas party would be the best event at £60 per head in addition to the race evening at £30 per head. A total of £90, which leaves the formal ball to be the taxed event. But, because employees brought guests to the ball there is a £200 benefit cash equivalent (total cost of one guest and one employee) being charged on directors and P11D employees.

Therefore if you use the tax exemption against the formal ball at £100 per head then the total cost of the Christmas party and race evening to the directors and P11D employees is £90. That’s £110 less than if you taxed the formal ball. You will save a higher taxpayer rate £44 (£110 x 40%) for the income tax and £14.08 (£110 x 12.8%) for the employers’ National Insurance. You don’t have an issue if you don’t go over the £150 tax exemption limit but you need to let your employees know before they spend too much money during the event.

In choosing which event or function to be tax exemption you need to look at the big picture as a whole. You could double the tax charges if guests are allowed to attend so use your tax exemption for events where guests are invited.