As an employer awarding employees for suggestions that benefit your business, you have no tax, National Insurance and reporting obligations – but only up to a certain limit.
There are 2 kinds of award:
- encouragement awards - for good suggestions, or to reward your employees for special effort
- financial benefit awards - for suggestions that will save or make your business money
Encouragement awards are exempt from tax and National Insurance up to £25.
Financial benefit awards are exempt up to £5,000. The amount that is exempt 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
- 10% of the money you expect it to make or save your business in the first 5 years after you put it into action
For an award to be exempt from tax and National Insurance:
- 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
- it must be likely that your employee would not have made the suggestion as part of their normal work
- the suggestion can’t be made at a meeting for proposing new ideas
If you give awards that are higher than these limits, the extra payment counts as earnings. Report the extra to HMRC and deduct and pay PAYE tax and National Insurance on it through payroll.
The following guides contain more detailed information: