The £150 Rule: Office Parties and Seasonal Food, Done Properly

Every autumn, a finance team somewhere discovers that the Christmas party they signed off in October has created a taxable benefit for 200 people in January. It is a solvable problem, and the rule that governs it is one of the few genuinely generous exemptions left in UK benefits legislation. It is also one of the least forgiving, because it works as a cliff edge rather than an allowance.

Here is how the £150 annual functions exemption actually operates, what breaks it, and how to plan a season of office food around it.

The rule

Section 264 of ITEPA 2003 exempts the cost of annual parties and similar functions, provided three conditions hold. HMRC's guidance is at EIM21690.

It must be annual. A recurring event: the Christmas party, the summer barbecue, the annual all-hands dinner. A one-off celebration of a deal closing is not annual, however festive it feels.

It must be open to all employees. Or to all employees at a particular location, if the business has more than one site. A directors-only dinner fails. A whole-office event where partners are also invited is fine, and guests count in the head-count calculation below.

The cost per head must not exceed £150 including VAT. Across all annual functions in the tax year combined, not per event.

Meet all three and there is no tax and no National Insurance. Miss any one and the whole amount becomes a taxable benefit.

The cliff edge everyone gets wrong

£150 is not an allowance you can exceed and then pay tax on the excess. It is a threshold.

Spend £151 a head, and the taxable benefit is £151, not £1. The whole cost falls into charge, every employee who attended is affected, and the employer pays Class 1A National Insurance at 15% on top.

This is the single most expensive misunderstanding in the whole area, and it is entirely avoidable with a spreadsheet.

How to calculate cost per head

Take the total cost of the event, including VAT, and divide by the total number of people who attended, including non-employee guests.

Total cost means everything the employer paid to put the event on: food, drink, venue hire, entertainment, and transport or overnight accommodation provided as part of the event. Not just the catering invoice.

The divisor is attendees, not invitees. This trips people up in both directions. Budget on expected numbers, then recalculate on actual attendance, because a poorly attended event can push the per-head figure over £150 even though the total spend was on plan.

A worked example. A 120-person firm books a venue at £4,000, catering at £6,200 including VAT, and a band at £1,300. Total £11,500. If 100 people attend, that is £115 a head and the exemption applies. If 70 attend, it is £164 a head, the exemption fails entirely, and the firm has created a £11,500 taxable benefit spread across 70 people.

Multiple events in one tax year

The £150 is an annual aggregate across all qualifying functions. If a company runs a summer party at £70 a head and a Christmas party at £95 a head, that is £165 and the exemption cannot cover both.

It can, however, cover one of them. HMRC allows the employer to apply the exemption to whichever combination of events best uses the £150, so in the example above the Christmas party at £95 is exempt and the summer party at £70 becomes the taxable one. Choose deliberately rather than chronologically.

The practical planning rule: decide the split in April, at the start of the tax year, not in November.

What the £150 does not cover

The seasonal lunches around the party. Team meals in December, the client-facing drinks, the "we survived the year" Friday lunch. These are not annual functions in the section 264 sense.

Gifts and hampers. A bottle of wine or a hamper is a separate question, and usually falls under the trivial benefits exemption if it costs £50 or less, is not cash or a cash voucher, is not contractual, and is not a reward for performance.

The daily meal programme. A recurring lunch budget is a taxable benefit in kind regardless of the time of year. December does not change its treatment.

Cash alternatives. Offering staff who cannot attend a cash equivalent makes that payment earnings, taxable through payroll in the normal way.

Three ways employers actually run the season

The single-event approach. One annual function, deliberately costed at £120 to £140 a head to leave headroom for late attendance drops, with everything else in December run as normal taxable catering or kept inside trivial benefits. Simplest to administer and the most common design.

The split-site approach. For firms with several offices, a separate event per location, each open to all staff at that site. Each is a qualifying function, and the per-head calculation is done per event. This is often cheaper per head than one central event, and better attended.

The distributed approach. Instead of one large party, a budget for each team to organise its own December meal. This is culturally popular and administratively awkward: to stay inside section 264, the events still need to be annual in nature and open to all staff, which team-by-team meals typically are not. Most firms who go this route accept the benefit is taxable and settle it through a PAYE Settlement Agreement so employees never see it. That is a legitimate choice, made deliberately.

Planning checklist

Six things to fix before booking anything.

1. Set the per-head cap at £130, not £150. The buffer absorbs a late attendance drop or a VAT surprise.
2. Confirm the event is open to all staff at the site, and record that it was.
3. Count the true total cost: venue, food, drink, entertainment, transport, accommodation, all including VAT.
4. Recalculate on actual attendance the week after, before the invoice is filed.
5. Decide the annual allocation in April if you run more than one event a year.
6. Keep the evidence: the invitation, the attendee list and the cost breakdown. HMRC enquiries into benefits almost always come down to records rather than principles.

How Ordit helps with the operational half

The tax treatment is your accountant's decision. The part Ordit affects is the cost control and the paper trail underneath it.

Catering delivery is £15 + VAT per drop and the service fee is 5% + VAT on monthly spend, both published on the pricing page, which means the per-head calculation can be done accurately before booking rather than discovered on the invoice. Orders are itemised by employee, team, site and expense code, so the attendee list and cost breakdown that the exemption relies on come out of the admin portal rather than out of someone's inbox.

For larger December events, office catering covers individually boxed meals, sharing platters and on-site pop-ups for 50-plus attendees, all with allergen information provided per item, which matters more at a party with guests than at a normal Tuesday lunch.

Frequently asked questions

Is the £150 per event or per year? Per year, aggregated across all annual functions. A single event can use all of it.

Does VAT count towards the £150? Yes. The limit is the VAT-inclusive cost per head.

Do partners and guests count? Yes, in the divisor. Their cost is included in the total and they are included in the head count.

What if we go over by a small amount? The entire cost becomes taxable, not the excess. This is why the working cap should sit below £150.

Can we cover the tax for employees if the exemption fails? Yes, through a PAYE Settlement Agreement. The employer pays the grossed-up tax plus Class 1B National Insurance, and employees see nothing. Agree it with HMRC in advance.

The full picture on how meal benefits are taxed, including the canteen exemption, trivial benefits and the routes employers use for daily budgets, is in the UK employee meal benefits tax guide.

This article is general guidance for UK employers, current as of August 2026. It is not tax advice. Confirm your treatment with your accountant or payroll advisor before committing spend.