Staff suggestion schemes- the tax-free way to reward your employees

At the time of a cost of living crisis, we are often asked about ways to reward staff.  A lot of the time the answer is no, unless you want to deduct tax and national insurance (NI). There is however, a scheme which has been in place for a number of years, but is often forgotten about.  It also encourages your employees to think about the business where they work, become more engaged and feel more valued whilst looking for workplace improvements. HMRC allows smaller, regular rewards to be made to employees and larger rewards for those who have been more innovative and creative. This can have a positive impact for employees (and employers!) and improve retention and reward.

What are these schemes, that allow for tax free payments to be made to our employees……

What are employee suggestion schemes?

Employee suggestion schemes are programs designed to encourage employees to share their ideas, suggestions, and solutions, to enhance the operations, processes, products, or services of a company.

Cash rewards to employee are usually subject to tax and National Insurance. However, through an employee suggestion scheme, it may be exempt from tax and NICs.

There are two kinds of award under employee suggestion schemes, which must be open to all staff – the first being encouragement awards for good suggestions or to reward your employees for special effort. To remain exempt, the value of this type of reward mustn’t exceed £25.

The other type are financial benefit awards for suggestions that will save or make your business money. If the suggestion results in a financial benefit for the company, then financial benefit awards are exempt from tax and NICs with an upper limit of:

• 50% of the money you expect the suggestion to make or save your business the year after you put it into action, or
• 10% of the money you expect it to make or save your business in the first five years after you put it into action

The exemption for financial benefit awards has a maximum limit of up to £5,000 regardless of the financial benefit for the company.

The caveats

However, not all types of rewards are eligible for tax exemptions. For instance, any rewards that are given as part of an employee’s contract of employment will be subject to income tax and NICs. 

Some additional criteria that must be met to ensure the tax and NIC exemption include that the suggestion must be outside the scope of the employee’s normal duties, the suggestion must not be made at a meeting held for the purpose of proposing suggestions, and the suggestion must result in improvements to service delivery and/or cost savings (or has some other intrinsic merit).

Employers are required to maintain accurate records of all rewards provided through the employee suggestion scheme, including details of the suggestion, the reward value, and the employee’s name. It is important to note that the record keeping requirements are not that onerous, and so this is still a really effective and underused tax efficient employee reward.

Employee suggestion schemes serve as a tool to unlock the potential of a company’s workforce by tapping into the ideas and insights of employees, encouraging innovation, and improving processes. However, it’s essential to navigate the guidance surrounding these schemes to ensure compliance with tax and national insurance regulations.

With the right support, which we can provide, establishing an employee suggestion has potential benefits for all parties with no discernible downsides – a rare, but welcome win/win situation. Contact our Employer Solutions team for more information.