Gifts of goods from someone other than your employer are tax free if the same donor’s gifts to you cost no more than £250 in a tax year, they are not cash or convertible vouchers, and they are not given for particular work you did. Hospitality from a client or supplier, such as a dinner or a box at a sporting event, is separately exempt if your employer did not arrange it and it is not a reward for specific services. Incentive awards from third parties, such as a manufacturer’s prize for sales targets, are taxable.

Why can a gift from a client or supplier be taxable at all?

Tax on employment income is not limited to what your employer pays you. Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) taxes anything that arises from the employment, whoever provides it. HMRC’s Employment Income Manual at EIM01040 gives the example of Wright v Boyce, where cash Christmas presents customarily given to a huntsman by members of the hunt were held taxable because the expectation of them attached to the job. The voucher rules apply in the same way: EIM16020 notes that the voucher and credit token legislation applies to vouchers provided by third parties as well as by employers.

So the starting point is that a present from a customer is potentially taxable. Two statutory exemptions then take most ordinary goodwill gifts and hospitality out of charge.

What is the £250 exemption for small gifts?

Section 324 ITEPA exempts small gifts of goods made to an employee or to a member of their family or household. EIM21715 sets out the conditions, all of which must be met:

  • the gift is not provided by the employer or a person connected with the employer;
  • neither the employer nor a connected person directly or indirectly procured it;
  • it is not made in recognition, or in anticipation, of particular services performed by the employee;
  • it is not cash, or vouchers or securities that can be converted into cash; and
  • the total cost to the donor of all such gifts to the employee in the tax year does not exceed £250, including any VAT, whether or not the donor can reclaim it.

The limit works per donor and per tax year. It is not a deduction: if one supplier’s gifts to an employee cost more than £250 in the year, tax is payable on the full amount, not just the excess. EIM01450 confirms that the exemption can extend to a voucher or token that can only be used to obtain goods.

When is third party hospitality exempt?

Section 265 ITEPA exempts goodwill entertainment provided by third parties to an employee or their family or household. EIM21837 lists the conditions:

  1. the provider is not the employer or a person connected with the employer;
  2. neither the employer nor a connected person directly or indirectly procured it; and
  3. it is not provided in recognition of particular services the employee has performed, or in anticipation of particular services to come.

There is no monetary limit. EIM21836 explains that entertainment has a wide meaning and includes hospitality of any kind: dinners, parties, hospitality tents at sporting events, and theatre or sporting events where the host invites someone as a guest. Associated transport and overnight accommodation are included.

The key distinction is between being entertained and being given something. EIM21836 says a mere gift of tickets to the theatre or a football match is not normally entertainment unless the provider or its representative is there to look after the guests. Tickets handed over for the employee to use alone are a gift and fall under the £250 rule instead. A holiday can sometimes count as entertainment if a representative of the provider is present throughout, but HMRC asks its officers to take special care that it is not a reward for particular services.

Where a voucher can be used for entertainment and other things, EIM21838 says only the part relating to entertainment is exempt; the rest stays taxable.

What about incentive awards from third parties?

Incentive awards are where third party benefits most often become taxable. EIM11202 describes them as rewards in cash, goods or holidays linked to things like sales performance, and gives the example of a car manufacturer rewarding a salesperson employed by a dealership. EIM21837 states that awards related to achieving specific targets or performance levels cannot use the entertainment exemption, and by the same reasoning they fail the particular services condition for small gifts.

EIM11205 sets out how they are taxed. A cash award is earnings equal to its amount. A non cash award is taxed on the full cost to the provider. The reporting depends on who pays:

  • Cash awards. EIM11215 says anyone making a cash award, including a third party, has to operate PAYE on it.
  • Non cash awards under a taxed award scheme. A third party can agree a taxed award scheme with HMRC’s Incentive Award Unit and pay the tax on the grossed up value at basic or higher rate. EIM11235 explains that the award remains assessable on the employee, who enters it and the tax paid on their tax return; more tax is normally only due if the scheme was at basic rate and the employee is a higher rate taxpayer.
  • Non cash awards with no scheme. HMRC can ask the third party for a return of awards under section 15 of the Taxes Management Act 1970. The employer usually has no reporting duty, because it did not arrange the award.

Who pays the National Insurance?

HMRC’s National Insurance Manual at NIM16351 to NIM16356 sets out the rules under section 10ZA of the Social Security Contributions and Benefits Act 1992. If the employer arranged or facilitated the award, all National Insurance stays with the employer: Class 1 on cash and vouchers, Class 1A on benefits in kind. If the employer did not arrange or facilitate it, Class 1A on a benefit in kind moves to the third party, but Class 1 on cash or cash vouchers remains the employer’s liability, and the third party should tell the employer so it can be added to pay. Under a taxed award scheme, NIM16360 explains that the Incentive Award Unit collects the Class 1 or Class 1A due. Our page on Class 1A National Insurance covers the employer side.

A worked example

Illustration only. A procurement manager receives the following from suppliers in the 2026 to 2027 tax year:

Item Treatment
Supplier A: a hamper costing £90 at Christmas Exempt small gift; total from A is under £250
Supplier B: dinner with its sales director, then a hospitality box at a rugby match with B’s staff hosting Exempt entertainment, with no monetary limit
Supplier C: two concert tickets, sent by post, and a case of wine, total cost £280 Taxable in full, as C’s gifts exceed £250
Supplier D: a £200 shopping voucher for placing a large order Taxable, as it rewards particular services

The manager should report the taxable items on their Self Assessment return if they are in it, or tell HMRC, because their employer will not have them on a P11D. Many employers also have gift and hospitality policies or bribery rules that apply regardless of tax.

How does this fit with the giver’s tax position?

The rules above decide whether the recipient pays tax. Whether the business giving the gift or hospitality can deduct the cost is a separate question, and entertaining clients is generally disallowed. Our page on business entertainment and client gifts covers that side. Gifts from your own employer are dealt with under different rules, including the trivial benefits exemption; see also gift vouchers and cash gifts to staff.

What mistakes come up most often?

  • Treating the £250 limit as an allowance, so that only the excess is taxed. Once it is exceeded the whole amount is taxable.
  • Assuming tickets are entertainment when the host is not present.
  • Treating a supplier’s target based reward as a goodwill gift.
  • An employer encouraging a supplier to reward its staff, which means the employer has procured the gift or facilitated the award and the exemptions fall away.
  • Employees not declaring taxable third party awards because nothing appears on their P11D.

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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.