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Suggestion schemes - awards to employees

This guide explains your tax and National Insurance contributions (NICs) obligations if you make an award to an employee under the terms of a suggestion scheme that you operate.

Awards that meet the exemption conditions described below – and that are within specified limits – don’t need to be reported to HM Revenue & Customs (HMRC) and you have no tax or NICs to pay on them.

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Conditions for exemption up to certain limits

If your award to an employee meets the conditions listed below, then - up to a certain limit - you’ll be able to provide it without having to report it or pay any tax or NICs on it.

For an award to qualify for this exemption:

  • the suggestion scheme must be open to all your employees – or to an entire group of employees, such as everyone based in a particular office
  • the suggestion leading to the award must relate to your business
  • the employee receiving the award couldn’t reasonably be expected to have made the suggestion in the course of their normal duties of employment
  • the suggestion can’t have been made at a meeting held for the purposes of proposing suggestions
  • the award must be either an ‘encouragement award’ or a ‘financial benefit’ award – these are explained in the next two sections

The rest of this guide explains the exemption limits that apply for different types of award and your resulting tax, NICs and reporting obligations. It also outlines reporting requirements where one or more of the exemption conditions aren’t met.

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You provide an ‘encouragement award’ that meets the exemption conditions

Definitions or restrictions

An encouragement award is an award made to an employee for a suggestion that has merit or that shows special effort on the employee’s part.

Encouragement awards are exempt from tax and NICs up to a limit of £25.

What to report, what to pay

If you make an encouragement award of up to £25, then you have:

  • no reporting requirements
  • no tax or NICs to pay

If you make an award of more than £25 then the amount above £25 counts as earnings, so:

  • add this excess to your employee’s other earnings
  • deduct and pay PAYE tax and Class 1 NICs using your usual payroll procedures

Work out the value to use

The value to use is the amount above £25.

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You provide a ‘financial benefit award’ that meets the exemption conditions

Definitions or restrictions

A financial benefit award is an award made to an employee for a suggestion that meets the following three conditions:

  • it relates to an improvement in efficiency or effectiveness
  • you must have decided to adopt the suggestion
  • you must reasonably expect the suggestion’s implementation to lead to a financial benefit

Financial benefit awards are exempt from tax and NICs up to the greater of the following, subject to an overall limit of £5,000:

  • 50 per cent of the financial benefit you reasonably expect the suggestion to lead to in the first year following its adoption
  • 10 per cent of the financial benefit you reasonably expect in the first five years following adoption

What to report, what to pay

If you make a financial benefit award up to the maximum exemption explained above, then you have:

  • no reporting requirements
  • no tax or NICs to pay

If you make an award that exceeds the maximum exemption, then the excess amount counts as earnings, so:

  • add it to your employee’s other earnings
  • deduct and pay PAYE tax and Class 1 NICs using your usual payroll procedures

Work out the value to use

The value to use is the amount above the maximum permitted exemption for the suggestion you’re rewarding.

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Technical guidance

EIM06600: Suggestion scheme awards

NIM16300: Staff suggestion benefits

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