Asking your employees for their suggestions regarding improvements and new ideas for the business is a great way to make them feel more engaged and valued. An employee suggestion scheme is an open and transparent way to ask for these ideas – and when set up in the right way, can be a way to reward your team for their creativity, ideas and innovations.

But what are the tax implications of a suggestion scheme? And how can you reward your employees without them losing this money to deductions and National Insurance (NI)?

The two types of suggestion scheme rewards

Payments made to employees as a reward for them making suggestions can be paid free of tax and NI deductions, under certain circumstances.

There are two types of suggestion scheme rewards:

  1. An encouragement award (EA), where the first £25 is free of deductions.
  2. A financial benefits award (FBA) which can be free of deductions up to a maximum of £5,000.

The suggestion scheme must be open to all employees, or to a specific subset of employees. For example, those in a particular department or at a particular location.

  • Any suggestion made must relate to the employer’s business.
  • The suggestion must not be one which the employee would be expected to make in the ordinary course of their duties.
  • The suggestion must also not be made at a meeting held for the purpose of gathering suggestions and must be made in the normal course of business.

The rules for encouragement awards

For an EA, the maximum you can pay your employee for any suggestion is £25. If the actual payment is greater, everything above £25 is subject to tax and NI in exactly the same way as their normal employment income.

If more than one employee makes the same suggestion, the £25 payable free of deductions is allocated in proportion to the payments actually made. So, If the total payment given to each employee is the same, then £12.50 is tax-free for each. But if Employee A is given £40 and Employee B is given £20, two thirds of the tax-free £25 is allocated to Employee A because she got two thirds of the pot. Employee B is then allocated the remainder.

The rules for financial benefit awards

For an FBA, the suggestion has to relate to an improvement in efficiency or effectiveness which your business adopts, and which you can reasonably expect to result in a financial benefit.

The maximum award is:

  • The greater of 50% of the benefit anticipated in the first year after implementation, subject to an overall cap of £5,000, or
  • 10% of the benefits anticipated during the first five years, also subject to the overall cap of £5,000.

If more than one employee makes the same suggestion, the calculated maximum payable free of deductions is allocated in proportion to the payments actually made. Where employees make more than one suggestion, additional awards can be made – each suggestion is treated separately with its own maximum deduction-free amount.

Talk to us about setting up an employee suggestion scheme

Rewarding staff for making suggestions to improve the business can act as a good motivator and shows that you’re keen to hear feedback and ideas from your team. Employees feel more involved in the business and you get the benefit of your staff’s innovations and creativity.

If you’re thinking about implementing a suggestion scheme, or you’re already running one, talk to us if you are unsure how the tax and NI aspects will work.


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