Tax year: 2026/27 | Last reviewed: 2 October 2026
Entertaining is one of the most misunderstood areas of business tax. Staff parties can be tax-free and fully deductible. Client entertaining is almost never deductible. Getting it wrong can create a tax bill for your team or a disallowed expense for the business.
Staff entertaining: the £150 annual function exemption
An annual event such as a Christmas party or summer barbecue is tax-free for employees if:
- it is open to all staff, or all staff at one location
- the total cost of annual events is no more than £150 per head per tax year, including VAT, food, drink, venue, transport and any overnight accommodation
The cost per head is the total cost divided by everyone attending, including guests. Directors count as employees, so in a company with only directors, the exemption still applies.
Important: it is a limit, not an allowance. If the cost per head goes £1 over £150, the whole amount becomes taxable, not just the excess. If you hold two events, you can choose which combination uses the exemption.
Tax relief for the business
Staff entertaining is fully deductible for corporation tax or income tax, and VAT is reclaimable on the staff element. Team-building days and training events with a genuine business purpose are separate and do not use up the £150.
Client entertaining
Taking clients or prospects out for meals, drinks or events is not deductible for tax, and VAT on it cannot be reclaimed. There are narrow exceptions, such as small gifts carrying your logo costing under £50 per person per year that are not food, drink or tobacco.
Even without tax relief, paying through the company can still be cheaper than paying personally. A higher rate director wanting to pay for a £100 client dinner personally would need a dividend of about £156, paying around £56 of dividend tax at 35.75%. Paid by the company, the cost is £100 with no relief, so it is still better to pay through the business, provided it is a genuine business expense.
Mixed events
If staff attend client entertaining, the cost relating to staff who are there to host clients is generally treated as client entertaining. Where clients attend a staff party, split the cost per head.
Travel and subsistence
Meals and accommodation while travelling on business, away from your normal workplace, are not entertaining and are deductible. Sole traders can claim reasonable meals on genuine business trips but not their everyday lunch.
Trivial benefits
Separately from entertaining, small gifts of up to £50 for personal occasions such as birthdays can be tax-free. See trivial benefits rules.
FAQs
Is the £150 limit per party or per year?
Per year, per head, across all qualifying annual events.
Can a one-person company have a Christmas party?
Yes. A director and partner can attend a party paid by the company within £150 per head, though HMRC expects a genuine event.
Where can I read about other staff benefits?
See investing in employees tax-efficiently.
Talk it through with Digivolve
Planning a Christmas party or team day? We will check it fits the £150 exemption so nobody gets an unexpected tax bill.
This article is general information based on the rules for the 2026/27 tax year as at October 2026. It is not personal tax advice. Rates and thresholds can change, so please speak to us before acting.