Tax Implications of Awards within an ideas programme


One question we are asked very often is can we reward people through the staff suggestion programme if an idea has been implemented.

This is an area that needs a lot of thought before proceeding, below is the text from the HMRC website about rewards

The following is an extract from: – Income Tax (Earnings and Pensions) Act 2003

321 Suggestion awards

(1)   This section applies where an employer establishes a scheme for the making of suggestions that is open on the same terms-

(a)   to employees of the employer generally, or

(b)   to a particular description of them.

(2)   No liability to income tax arises in respect of an encouragement award or financial benefit award made under the scheme for a suggestion which meets conditions A to C if, or to the extent that, it does not exceed the permitted maximum for the award under section 322.

(3)   Condition A is that the suggestion relates to the activities carried on by the employer.

(4)   Condition B is that the suggestion is made by an employee who could not reasonably be expected to make it in the course of the duties of the employment, having regard to the employee’s experience.

(5)   Condition C is that the suggestion is not made at a meeting held for the purpose of proposing suggestions.

(6)   In this section and section 322-

“encouragement award” means an award, other than a financial benefit award, made for a suggestion with intrinsic merit or showing special effort, and

“financial benefit award” means an award for a suggestion relating to an improvement in efficiency or effectiveness which the employer has decided to adopt and reasonably expects will result in a financial benefit.

322 Suggestion awards: “the permitted maximum”

1)     The permitted maximum for an encouragement award for the purposes of section 321 (suggestion awards) is £25.

2)     The permitted maximum for a financial benefit award where no such award for the suggestion has been made before is-

  1. if only one such award is made for the suggestion, the suggestion maximum, and
  2. if two or more such awards are made on the same occasion to different persons for the suggestion, the appropriate proportion of the suggestion maximum.

3)     If on a later occasion or occasions one or more further such awards are made for the same suggestion, the permitted maximum for each is-

  1. if only one such award is made for the suggestion on that occasion, the residue of the suggestion maximum, and
  2. if two or more such awards are made on the same occasion to different persons for the suggestion, the appropriate proportion of that residue.

4)     The suggestion maximum for a financial benefit award is the financial benefit share or £5000 if that is less.

5)     In subsection (4) “the financial benefit share” means the greater of-

  1. half the financial benefit reasonably expected to result from the adoption of the suggestion for the first year after its adoption, and
  2. one-tenth of the financial benefit reasonably expected to result from its adoption for the first 5 years after its adoption.

6)     In this section-

“the appropriate proportion” means such proportion as the award bears to the total of the financial benefit awards made on the same occasion for the suggestion,
“the residue of the suggestion maximum” means the suggestion maximum less the total previous exemption, and
“the total previous exemption” means the total of the amounts exempted from income tax under section 321 in respect of financial benefit awards for the suggestion made on previous occasions.

As you can see, the wording is very ambiguous and not very clear. There are a few points we would recommend before deciding on rewards:-

  1. Before rewarding, always check whether the idea forms part of the person’s job or responsibilities.
  2. Don’t reward until the idea is implemented and tangible savings are realised.
  3. Always double check with the HMRC to ensure your scheme falls within the guidelines above.
  4. Check with your HR or payroll team to double check they are able to deduct tax before the award is paid if necessary.
  5. If in doubt, always check, you will find HMRC very approachable and will be more than willing to help.
  6. Always keep records about payments made and always keep these records for a minimum of SIX years.

Best practice these days is to focus on recognition rather than reward, a good quality ideas scheme with high levels of recognition can have a much higher impact than a scheme that focuses solely on rewards.

Further information can be found here

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