Tax-free employee suggestion schemes
Do you have an employee suggestion scheme in place? There are still commercial and tax advantages to setting up such a arrangement. HMRC offers two tax-free award schemes that can be made available to employees:
- Encouragement awards – for good suggestions, or to reward your employees for special effort. Encouragement awards are exempt from tax and National Insurance up to a small limit of £25. Any excess paid above £25 will need to be reported through payroll.
- Financial benefit awards – for suggestions that will save or make your business money. Financial benefit awards are exempt up to a generous maximum cap of £5,000. The amount that is exempt is the greater of: 50% of the money you expect the suggestion to make or save your business the year after you put it into action, and 10% of the money you expect it to make or save your business in the first 5 years after you put it into action.
There are also other conditions that must be met for the payments to employees to be considered tax-free.
Planning note: We can assist you in designing and setting up a tax efficient suggestion scheme for your staff and provide you with basic scheme rules. This may be an opportune time to sound out employees so that you can see who is engaged in the profitable development of your business, and offer winning entries with a possibly generous tax-free incentive.