Is Staff Entertainment Tax Deductible

Find out if staff entertainment is tax deductible in the UK and how it applies to limited companies, sole traders, and directors.

Staff entertainment is a common way to reward employees, boost morale and mark important occasions in the workplace. Whether you are hosting a Christmas party, organising a summer team-building day or simply treating your staff to lunch, it’s important to understand whether these costs are tax deductible.

The good news is that staff entertainment can be tax deductible in the UK, but only if the right conditions are met. HMRC distinguishes between staff entertainment and client entertainment, with different tax consequences for each. Staff events can qualify for tax relief if they are intended solely for employees and meet certain limits and reporting rules.

This article explains when staff entertainment is tax deductible, how to avoid triggering tax charges, and what documentation you need to stay compliant.

What Counts as Staff Entertainment?

Staff entertainment includes any event, hospitality or benefit provided to employees as part of their role in the business. This can cover a wide range of activities, including:

  • Annual parties such as Christmas or summer events

  • Team-building days

  • Meals or drinks for employees

  • Social outings, such as bowling or cinema trips

  • Awards evenings or celebration events

  • Virtual events with food or gift packages for home delivery

The key requirement is that the entertainment is exclusively for employees, not clients, suppliers, shareholders or other third parties. Directors can also count as employees for these purposes, especially in small limited companies.

If the event is attended by both employees and non-employees, the cost must be apportioned accordingly. Only the staff-related portion can be treated as tax deductible.

Is Staff Entertainment Tax Deductible?

Yes, staff entertainment is generally tax deductible as a business expense if:

  • It is provided wholly and exclusively for business purposes

  • It is intended to reward or motivate employees

  • It is not part of a contractual benefit or salary arrangement

  • It complies with HMRC’s rules on allowable events

These costs can be deducted when calculating your taxable profits for Corporation Tax (if you operate a company) or Income Tax (if you are a sole trader or partnership).

As long as the entertainment is for employee benefit and not connected with business generation (like schmoozing clients), it is usually considered an allowable expense.

The £150 per Employee Exemption

For limited companies, HMRC offers a specific tax exemption for staff events, provided the cost is:

  • Less than £150 per head per tax year

  • An annual event (e.g. Christmas party or summer barbecue)

  • Open to all employees (or all employees at a particular location)

If these conditions are met:

  • The cost is not taxable on the employee

  • The employer can deduct the expense against Corporation Tax

  • There is no need to report it on a P11D

  • There is no Class 1A National Insurance due

This exemption is per person, per tax year, and can cover multiple events if the combined cost stays within the limit. If the combined cost exceeds £150, the whole amount becomes taxable, not just the excess.

For example:

  • Christmas party costs £100 per person

  • Summer BBQ costs £40 per person

  • Total is £140: fully exempt

  • Add a third event costing £30, taking the total to £170

  • You must choose which event(s) to exempt. The one(s) outside the exemption must be reported as a benefit

You must also include the cost of any transport, accommodation, food or drink provided as part of the event when calculating the cost per head.

VAT on Staff Entertainment

If your business is VAT registered, you may be able to reclaim the VAT on staff entertainment expenses, but only when the entertainment is for employees and not customers, clients or other non-staff members.

You cannot reclaim VAT on events or activities that include clients or suppliers unless they also pay to attend, or unless the benefit is incidental and you are not entertaining them in the business sense.

If you provide entertainment for both employees and non-employees, you will need to apportion the VAT and only reclaim the part relating to employee attendees.

Sole Traders and Partnerships: Special Considerations

If you are a sole trader or in a partnership without employees, HMRC does not allow entertainment for yourself to be claimed as a business expense. You are not considered an employee of your own business.

For example:

  • A sole trader cannot claim the cost of a meal or party for themselves as staff entertainment

  • But if they have employees, the cost of entertaining those employees may be deductible

In a partnership, entertainment provided to the partners themselves is also not deductible, but staff-related costs may be, provided the expense is for the benefit of other employees.

Staff Entertainment vs Client Entertainment

It is important to distinguish staff entertainment from client entertainment, which is not tax deductible and not eligible for VAT recovery.

Client entertainment includes:

  • Taking a client out for lunch or drinks

  • Hosting a table at a corporate event

  • Providing hospitality during a sales pitch or networking session

These costs must be excluded when calculating taxable profits and cannot be used to reduce your VAT bill.

In some cases, such as joint events involving both staff and clients, you may need to apportion costs and apply different tax treatments accordingly.

Reporting Requirements

If your staff entertainment does not meet the conditions of the £150 exemption, you must:

  • Report it on the employee’s P11D as a benefit in kind

  • Pay Class 1A National Insurance on the benefit

  • Alternatively, you can include it in a PAYE Settlement Agreement (PSA) to cover the tax and NI on behalf of your staff

Using a PSA simplifies matters and avoids employees being taxed personally, but it does increase the employer’s cost.

If you intend to rely on the £150 exemption, ensure your event qualifies and keep clear records of:

  • Total cost of the event

  • Number of attendees

  • Cost per head including VAT, transport and any extras

This information may be needed if HMRC ever asks for justification.

Director-Only Events

If you are a limited company with only one or two directors and no employees, you can still claim the cost of an annual event as long as it is open to all employees, and you meet the exemption criteria.

In one-person companies, this means the director can effectively hold a tax-free annual event for themselves if the cost is below £150. However, events attended by family or non-employees may complicate the claim, especially if costs are shared.

Conclusion

Staff entertainment is tax deductible in the UK when provided solely for the benefit of employees and not part of a contractual salary arrangement. The £150 per person exemption allows employers to reward staff with annual events like parties or team-building days without triggering a tax or National Insurance charge, provided the rules are followed carefully.

To remain compliant and claim full relief:

  • Keep employee-only events separate from client entertainment

  • Stay within the £150 per person threshold

  • Maintain accurate records and apportion costs when needed

  • Consider a PAYE Settlement Agreement if you want to absorb any tax on your employees’ behalf

Staff entertainment, when done right, can boost morale, foster team spirit and be a fully allowable business expense. Just ensure you stay within HMRC’s guidelines and apply the correct treatment to avoid unexpected tax consequences.