Rewarding staff for their ideas and suggestions is a great way of motivating them, but what if you could do it in a way that was tax-free for them and tax-efficient for you, the business owner?
Well, you can.
There are two kinds of award that you can make to your employees which won’t hit them with any tax or national insurance.
Firstly, encouragement awards can be made for good suggestions that benefit your business. You can pay the employee up to £25 without any tax or national insurance implications. And you don’t even have to implement their suggestions; the idea of this perk is to encourage the flow of ideas.
However, if you’re looking to motivate staff more, with larger tax-free awards, then financial benefit awards can be given for suggestions that will save or make your business money and these are exempt from tax and national insurance up to a value of £5,000.
Financial benefit awards are exempt from tax and national insurance up to a value of £5,000. The amount you can pay your employee is the greater of the following:
- 50% of the money you expect the suggestion to make or to 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 five years after you put it into action
As an example, let’s suppose someone comes up with an idea that you expect will increase your business profits by £8,000 next year and a further £10,000 in years two to five.
The financial benefit award will be capped at the greater of:
- 50% x £8,000 = £4,000
- 10% x (£8,000 + £10,000 + £10,000 + £10,000 + £10,000) = 10% x 48,000 = £4,800
So, you can pay the employee £4,800; there is no need to report this to HMRC and there will be no tax or national insurance suffered by the employee. Your company will, of course, get corporation tax relief on the payment.
Note that the £4,800 is below the £5,000 overall cap. If the projected improvements in profitability had been, for example, £12,000 in each of years two to five, the five-year expected benefit would have been £56,000 rather than £48,000 and 10% x £56,000 = £5,600. The award would have been capped at £5,000.
So, what are the qualifying conditions for an award to be tax and national insurance exempt? Well, for both the £25 encouragement award and the ‘up to’ £5,000 financial benefit award, the following conditions must be satisfied.
- the suggestion scheme must be open to all employees or to an entire group of employees; for example, if you operate over several sites, everyone at one site would be a group for this purpose.
- the suggestion must be about your business
- it must be likely that the employee would not have suggested the idea as part of their normal work; for this reason, we’re really looking at ideas ‘outside the normal scope’ of what an employee would be expected to generate. A production worker coming up with a marketing idea would be okay, but not a marketing manager coming up with a marketing idea! It must be made by an employee who could not reasonably have been expected to make it in the course of the duties of their employment, having regard to the employee’s experience
- the suggestion can’t be made at a meeting where the purpose of the meeting is for proposing new ideas
If you give awards that are higher than these limits, the extra payment counts as earnings which will be subject to tax and national insurance and must go through payroll and be reported to HMRC.
The financial benefit award must also satisfy the following.
- The suggestion for which the award is being given must relate to an improvement in efficiency or effectiveness.
- You, as a business, must have decided to adopt the suggestion – a financial benefit award can’t be made just for an idea if that idea is not then implemented. Note that for the £25 encouragement award, the suggestion does not have to be implemented – the purpose of this is just to generate a good flow of ideas.
- You as the business must reasonably expect the financial benefit will be realised; for this reason, detailed forecasts should be drawn up showing the expected financial impact of the suggestion and the reasonable grounds on which the assumptions to that forecast have been made.
Please let EBA know if you want any assistance in implementing an awards programme.
