Tax Tip 6:How to set up a tax free employee suggestion scheme

An employee suggestion scheme is a formal mechanism which encourages employees to contribute their ideas on how to improve your business. You can reward these ideas with a tax free payment to the employee.

How to set up a Scheme….

It is simple to set up a suggestion scheme. Typically all it involves is employees writing their idea on a piece of paper and placing it into a suggestion box.

The box is then emptied on a regular basis by an appropriate manager who reads the suggestions. These suggestions should then be discussed by senior management.

If a suggestion is successful and is implemented, you can reward the member of staff either financially or by way of encouragement awards (an award that is not of financial benefit).

Financial Benefit Award

There are rules and regulations in place that govern tax free suggestion schemes. To be eligible for a tax free exemption a financial benefit award must comply with the following.

An award can only be given for a suggestion:

– relating to an improvement in efficiency or effectiveness

– which the employer has decided to adopt and

– which the employer reasonably expects will result in a financial benefit.

The suggestion maximum for a financial benefit award is the greater of:

– half the financial benefit that the employer reasonably expects will result from the adoption of the suggestion in the first year after its adoption, or

– one tenth of the financial benefit that the employer reasonably expects to result from its adoption in the first five years after its adoption,

subject, in each case, to an over-riding maximum of £5,000.

The amount arrived at above is the maximum that the employer can pay, tax free, in respect of a single suggestion.

So what are you waiting for…..

The Employee Suggestion schemes are simple to set up. All you need is a suggestions box, to designate a manager to the scheme and to set out the rewards for suggestions before implementation.

This provides employees with financial benefit and can increase motivation and productivity among teams.

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