Q:I’m thinking about introducing a scheme encouraging employees to bring forward ideas to improve my business, offering a significant reward for the best suggestion. I’m looking at all options including cash award prizes. What do I need to know from a tax liability perspective?
A: Introducing some kind of reward scheme for your staff could be a helpful and morale-boosting move to make. But you are right to be thinking about what the tax implications are. There are specific rules governing this, which we can summarise for you here.
Essentially, you do get a tax break – to some extent – for schemes that match certain criteria. You won’t have to pay tax, NI or report anything to HMRC for awards you pay staff of up to £5,000. That is, of course, if they are being rewarded for ‘suggestions that will save or make your business money,’ as stated by HMRC.
There’s also something called an encouragement award ‘for good suggestions, or to reward your employees for special effort’. These are only exempt from tax and NI, however, for awards up to £25.
Unsurprisingly, there are also several conditions. These include:
- all staff must be able to take part in the suggestion scheme
- suggestions must be about your business
- the proposal wouldn’t have been put forward as part of a member of staff’s standard everyday work
- the suggestion is not made at a ‘meeting for proposing new ideas’
If you decided you wanted to go above these limits, you need to be aware that any amount over and above will count as earnings, thereby attracting tax and NI in the usual manner, with the associated reporting obligations also coming into effect.
