It’s been a long time since one of my emails got as many responses as the one from two weeks ago on gifts for employees.
(I think it was only beaten by the one when I’d set fire to my kitchen but Louise won’t let me repeat that just for a bit of engagement.)
Anyway, I thought I’d share another HMRC-approved scheme for rewarding your team members.
This one is about bonuses for suggestions made by your team to improve the business.
There are two types of reward:
1 – Encouragement Award
When can you use it?
To recognise good ideas or extra effort – think of it as a pat on the back to keep ideas flowing.
What’s the tax-free limit?
Up to ÂŁ25 per award. Anything above that is taxable and NI-able.
2 – Financial Benefit Award
When can you use it?
When a suggestion is going to save or make the business money.
What’s the tax-free limit?
The tax-free amount is the greater of:
- 50% of the first year’s expected net benefit, or
- 10% of the benefit over the first five years.
There is also a cap of ÂŁ5,000 on any Financial Benefit Award.
Four golden rules
Of course, HMRC has a few terms and conditions so the award must tick these four boxes:
- Open to all (or a whole group). Your scheme can’t be invitation-only for the chosen few. A “group” could be a particular office but you can’t pick and choose within that office.
- About your business. The idea has to improve your operations, not a suggestion that helps someone else, eg a client.
- Beyond the day job. HMRC expects the suggestion to be outside the employee’s normal duties. If they’re paid to solve this problem anyway, there’s no exemption.
- Not made in a meeting for new ideas. Strangely specific, but HMRC says suggestions blurted out in a brainstorm don’t count.
Miss any of these and your “thank-you” is just extra salary in disguise.
It’s also worth noting that you can pay one person for multiple ideas (ie the limit is reset) but there is a limit per idea so, if two people came up with same idea the tax-free amount is split 50:50.
Designing a scheme that works (and keeps the tax-man happy)
- Keep the rules in writing – eligibility, how you’ll measure savings, who signs off awards.
- Document the maths – when you pay a financial-benefit award, file the calculation showing the expected savings.
- Track cumulative payments – there is no limit per person, but there is a limit per idea. You might pay part of the reward for a promising suggestion and the rest when it’s been fully evaluated.
- Tell payroll early – anything above the exemption must go through PAYE in the same period.
How does it work in real life?
Beth spots a fix that will shave ÂŁ6,000 off your energy bills in year one and ÂŁ25,000 over five years.
- 50% of year-one saving = ÂŁ3,000
- 10% of five-year saving = ÂŁ2,500
So the tax-free award can be up to £3,000 (the higher figure). If you decide to hand her £4,000, the extra £1,000 is taxable pay.
Need a second pair of eyes on the numbers or the policy wording? Email su*****@*********************co.uk or give us a ring on 0151 380 8084.
As always, if you’re not sure where the tax-free line ends, our payroll and tax teams are here to keep you on the right side of HMRC.
Many thanks
Jon