A cash gift from an employer to an employee is almost always taxable earnings and goes through payroll with PAYE and Class 1 National Insurance. Shop vouchers are non cash vouchers: income tax is due on the cost through the P11D and Class 1 National Insurance through payroll. The main way out is the trivial benefits exemption, which can cover a non cash voucher costing £50 or less but never cash or a cash voucher.

Why is a cash gift to staff taxed?

Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) taxes anything that is an emolument of the employment. HMRC’s Employment Income Manual at EIM01040 states that Christmas presents paid in cash by employers to employees are almost invariably taxable as earnings, and that all directors and employees are taxable on cash gifts from their employer because of the deeming provision in section 201(3).

The test is whether the payment arises from the employment. EIM01450 says a gift in cash or with money’s worth counts as earnings when it does. EIM01460 recognises that a gift made on personal grounds, such as a wedding present, or purely as a mark of personal esteem, may not be earnings, but HMRC stresses that the cases where gifts escaped tax had special facts. A cash sum handed to every member of staff at Christmas, at a year end, or after a good quarter is a reward for being an employee. It is taxed like a bonus; our page on how bonuses are taxed explains how PAYE treats one off payments.

How are gift vouchers taxed?

Vouchers have their own code in Part 3 Chapter 4 of ITEPA. EIM16040 explains that section 84 gives a very wide meaning to a non cash voucher: it covers ordinary high street gift cards and any voucher, stamp or token that can be exchanged for goods or services. Section 75 defines a cash voucher as one that can be exchanged for a sum of money not substantially less than its cost. EIM16110 notes that cash vouchers are rare in practice; a supermarket or multi store gift card is a non cash voucher.

The GOV.UK employer guidance on vouchers sets out what you must do:

Type Income tax National Insurance
Cash, or a voucher exchangeable for cash PAYE through payroll Class 1 through payroll
Non cash voucher (goods or services only) Report on form P11D Class 1 through payroll on the cost (not PAYE tax)

Under EIM16140 the taxable amount of a non cash voucher is the expense the provider incurs on the voucher and on the goods or services it can be exchanged for, less anything the employee makes good. The charge generally arises in the tax year the expense is incurred, or the year the employee receives the voucher if later. The P11D side is covered in our guide to benefits in kind and the P11D.

When does the trivial benefits exemption apply?

Section 323A ITEPA exempts a benefit, and the GOV.UK guidance confirms there is then no tax, no National Insurance and no reporting, if all four conditions in EIM21864 are met:

  1. the cost of providing it does not exceed £50 (or the average cost per head where it is impracticable to work out each person’s share);
  2. it is not cash or a cash voucher;
  3. the employee is not entitled to it under their contract, including salary sacrifice; and
  4. it is not given in recognition, or anticipation, of particular services performed in the job.

EIM21866 is clear that cash and cash vouchers should not be treated as trivial benefits however small the amount, but a non cash gift voucher can qualify. HMRC’s own example is an employer giving a £25 bottle of wine at Christmas, with a £25 supermarket voucher for staff who do not drink: both can be exempt. EIM21865 adds that the cost is the VAT inclusive amount, and that if the cost exceeds £50 the whole amount is taxable, not just the excess. Our full page on the trivial benefits exemption deals with the average cost rule and other examples.

What limit applies to directors of close companies?

Where the employer is a close company, the trivial benefits given to a director or other office holder, or to members of their family or household, are capped at a total cost of £300 in a tax year. EIM21869 explains that the cap is per individual and per employer, and that once a benefit takes the running total over £300, the whole cost of that benefit is taxable, while earlier benefits stay exempt. A director who also receives vouchers as an employee therefore needs a simple log of what has been provided and when. The close company rules page explains which companies are close.

Why does a reward voucher fail the exemption?

The fourth condition is the one most often broken. A voucher given to the employee who hit a sales target, to the team that finished a project early, or to a member of staff who covered for a colleague is given in recognition of particular services. It is taxable however small. EIM11205 confirms that cash incentive awards are earnings equal to the amount of the award and non cash awards are taxed on their full cost to the provider. A voucher given to everyone for a birthday, a wedding or Christmas, with no link to performance, can still qualify if it meets the other conditions.

The same applies to reimbursement. EIM21866 explains that where the employer reimburses something the employee bought, the payment is cash and cannot be a trivial benefit.

Can a PAYE Settlement Agreement cover gifts to staff?

For vouchers and gifts that are not exempt, an employer can avoid putting them through payroll by paying the tax itself under a PAYE Settlement Agreement. The GOV.UK guidance lists small gifts and vouchers, and incentive awards, as examples of the minor items a PSA can cover, but it cannot include cash payments such as bonuses. Under a PSA the employer pays the tax on a grossed up basis plus Class 1B National Insurance, and the employee pays nothing. EIM11205 confirms that a PSA cannot be used for cash incentive awards. See our page on PAYE Settlement Agreements for how the calculation works.

A worked example

Illustration only. A small company with ten staff wants to thank everyone at Christmas. It is considering three options:

  • £40 cash added to December pay. Taxable earnings. PAYE and employee and employer Class 1 National Insurance are due, so a basic rate employee keeps less than £40.
  • A £40 voucher for a national retailer for each employee. A non cash voucher under £50, not contractual and not linked to performance, so it is a trivial benefit. No tax, no National Insurance, nothing to report.
  • A £75 voucher each. Over £50, so the full £75 is taxable: £75 goes on the P11D and through payroll for Class 1 National Insurance, unless the company includes it in a PSA.

If one of the ten is a director shareholder in this close company and has already received £280 of trivial benefits in the tax year, the £40 voucher takes the total to £320. That voucher is fully taxable for the director, though it remains exempt for the other nine.

What mistakes come up most often?

  • Paying a small cash sum at Christmas and treating it as tax free because it is under £50.
  • Giving prepaid cards or vouchers that can be exchanged for cash and treating them as non cash.
  • Labelling a performance reward as a gift. The reason for the gift decides the treatment, not the label.
  • Splitting a £100 gift into two £50 vouchers on the same occasion. HMRC looks at the cost of the benefit, not how it is packaged.
  • Forgetting the Class 1 National Insurance on non cash vouchers that are not exempt, because only the income tax goes on the P11D.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.