Remind yourself of the tax exemption rules
Employee suggestion schemes can positively benefit a business and there is value in encouraging your team for taking the time to offer constructive recommendations.
HMRC recognise two different kinds of award:
- Encouragement awards: for good suggestions, or to reward employees for special effort. The suggestion need not be implemented by the employer to qualify. The purpose of the award is to encourage the submission of suggestions generally; and
- Financial benefit awards: for suggestions that will save or make your business money. Where the employer intends to adopt the suggestion and can be reasonably expected to gain a financial benefit.
Encouragement awards are exempt from tax and National Insurance up to £25.
Financial benefit awards are exempt from tax and National Insurance up to £5,000. The exemption amount 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; or
- 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 specific rules which change the exemption amount if an award has previously been paid out on that suggestion and/or if more than one employee is involved in the suggestion.
Exemption criteria
For an award to be exempt from tax and National Insurance, the following must apply:
- The suggestion scheme must be open to all your employees – or to an entire group of employees (eg everyone in a particular office);
- The suggestion must be about your business and relate to its activities;
- It must be likely that your employee would not have made the suggestion as part of their normal work, having regard to the employee’s experience; and
- The suggestion can’t be made at a meeting for proposing new ideas/suggestions.
When to pay tax
For cash awards that are more than the specified limits, the additional payment counts as employee earnings and therefore you will need to report this to HMRC and
- Add the amount of the award to the employee’s other earnings; and
- Deduct and pay Class 1 National Insurance and PAYE through payroll.
For non cash awards more than the specified limits, the additional value needs to go on form P11D. Alternatively, the employer can choose to pay the tax for the employee by a PAYE Settlement Agreement.
Please note the tax is a lot higher overall with a PAYE Settlement Agreement, as the employer is paying the tax for the employee and therefore the total award to the employee is the taxable award value plus the tax the employer is paying on the employee’s behalf. The tax is then calculated on this larger grossed-up value to calculate what the employer then has to pay in tax under a PAYE Settlement Agreement.
How M+A Partners can help
M+A Partners’ team of experts can work with you to advise on tax-free benefits/payments to employees or explain the tax consequences of benefits provided. We can also assist with PAYE Settlement Agreements and their calculations.
To find out more, get in touch with your usual M+A Partners’ contact or contact myself using the below details.
