Suggestion scheme awards. What are they and are they tax free?

This post discusses the main talking points of  suggestion scheme awards and where employees and employers both stand in relevance to them. Read on to find out how it may affect you.

A suggestion scheme is a system by which employees are asked to suggest ways in which an organisation can improve products/services, the way it operates, etc. Up to a certain limit there is a tax exemption in respect of suggestion scheme payments to employees. The exemption applies where the scheme is open to employees generally or to a particular group of employees and provided the below conditions are satisfied:

  • The suggestion relates to activities carried on by the organisation (employer)
  • The suggestion is made by an employee who could not be expected to make it as part of their normal job, taking into account their experience
  • The suggestion is not made at a meeting for the purpose of promoting suggestions

What type of awards can we make?

There are two types of award that may be made under a suggestion scheme;

Encouragement – for good suggestions or to reward them for special effort.

Financial benefit – for a suggestion relating to an improvement in efficiency or effectiveness that the employer has decided to adopt and reasonably expects will result in financial benefit.

What is the limit?

The amount that can be awarded tax free is subject to a monetary cap, £25 for an encouragement award, per suggestion.

The financial benefit awards rules are more complicated and rewards are exempt up to £5,000. The exempt amount is the greater of;

  • 50% of the money expected to be made or saved by the organisation as a result of implementing the suggestion
  • 10% of the money expected to be made or saved by the organisation in the first 5 years of implementing the suggestion

If the organisation awards amounts that are greater than the above limits then the excess is subject to tax and NI to be deducted via the payroll.

What happens if more than one financial benefit award is made?

If more than one award is made on the same occasion to different people, the suggestion maximum must be apportioned between those people.

Is there a limit to the number of tax-free encouragement awards that we can make?

No, but each award is subject to a tax-free limit of £25.

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