11 May The suggestion of tax-free benefits
An employee has recommended you start a staff suggestion scheme. Apart from the advantages for your company, payments for suggestions can be tax exempt. Can you start by paying a tax-free sum to the employee who came up with the idea?
Staff suggestions schemes
Staff suggestion schemes can work well. Typically you’ll find employees are keen to come forward with ideas at first, but after a while these fizzle out. One way to keep things fresh is to offer a financial incentive, especially if it can be tax free.
The good news is that a special exemption allows you to pay employees a tax and NI-free sum for suggestions you put into practice, and sometimes even when you don’t. As you would expect there are several conditions to meet:
- you must have a suggestion scheme in place before an exempt payment can be made
- the scheme must be open to all your employees or class of employees on the same terms
- the suggestion could not reasonably have been expected to be put forward as part of the employee’s normal job
- the suggestion is not made at a meeting held for the purpose of proposing suggestions
The maximum amount you can pay an employee for a suggestion, tax and NI free, is £5,000. If more than one employee comes up with the idea the exemption must be divided between them. However, you can’t arbitrarily use the maximum exemption. The rules contain a formula for working out the actual tax and NI-free amount.
The exempt amount, subject of course to the £5,000 maximum, is the greater of:
- 50% of the expected net financial benefit for your business during the first year the suggestion is implemented; or
- 10% of the expected net financial benefit over a period of up to five years
How do we work that out?
There are potentially so many factors involved in the calculation, not to mention a fair amount of guesswork, that arriving at anything like an accurate figure is enough to put you off the idea of trying to use the exemption. However, the rules contain two important words which make it feasible: “reasonably expected”.
Tip. You only have to work out the amount of financial benefit that can be reasonably expected at the time it’s first implemented. This is where your bookkeeper or accountant earns their pay. In practice any sensible calculation they come up with is unlikely to be challenged by HMRC.
Well done, but…
We mentioned earlier that you can pay a tax and NI-free sum for suggestions that you don’t put into practice. This is allowed, in the words of the legislation, for a suggestion which has “intrinsic merit or showing special effort” . The disappointing news is that the maximum tax and NI-free amount you can pay for such suggestions is a stingy £25.
Consolation prize. £25 is better than nothing we suppose. You can pat the employee concerned on the back, commend them for a “nice try” before handing them their tax-free cash and pointing them towards the pub to buy the first round.
The person who had the idea can’t qualify for a tax-exempt payment because one of the conditions is that there must first be a proper scheme in place which is open to all staff. Once there is a scheme you can pay an employee up to £5,000 tax and NI free for a suggestion you put into practice and £25 for one you don’t.