EXPENSES - 25.05.2006

What would you suggest?

Tax-free

Problem. It is becoming increasingly difficult to reward employees with benefits, as these are taxed and subject to employers’ NI at 12.8%. But employees can be rewarded for making suggestions to you. These can be paid gross without tax and NI implications (Employment Income Manual para EIM06600 and s.321 Income Tax (Earnings and Pensions) Act 2003).

Limits. Tax-free awards of up to £25 encouraging employees’ suggestions are allowed, but this can be increased to £5,000 if their suggestion is implemented and the benefits recorded. There is no limit to the number of suggestions that one employee can make. However, employees receiving more than £5,000 for one suggestion will have the excess taxed and NI’d (both employees’ and employers’).

Example. If you were to make an award to an employee of, say, £500, there is no income tax or NI to pay. Paying them a bonus instead so that they end up with £500 (after taxes) could cost you nearly £1,000 (including employers’ NI).

Conditions

Duties. The suggestion must be outside the scope of the employee’s normal duties. For example, a salesman may be expected to suggest new product ideas, so any awards for this would be outside the tax-free scheme.

Official. You must formally set up the scheme. However, there is no need for the prior approval from the Taxman. In other words, show how it will operate and ensure it’s open to all employees, but not paid as part of their contractual entitlement.

For a sample list of “staff suggestion scheme rules” visit http://tax.indicator.co.uk (TX 06.16.04).

Admin

Calculations. A financial benefit award must not exceed 50% of the expected net financial benefit during the first year of implementation, or 10% of the expected net financial benefit over a five-year period - whichever is the greater. This means that you need to estimate the cost savings or extra sales revenue from the suggestion. As long as your recorded calculations show the savings were broadly achievable at the time of the award then this will suffice.

Meetings. Make sure there are no formally constituted staff meetings to discuss suggestions. Instead go to the pub to have a chat with your colleagues. Attending a “suggestions” meeting is classed as part of the employee’s duties and so makes any award taxable.

Discretion

No returns. You are not required to record any reasons for accepting or declining suggestions; you decide which employees get paid. You don’t even have to make any special returns to the Taxman for payments made under the scheme.

Tip. There are no restrictions as to which employees/directors it can apply to. For example, a colleague or outside advisor may have suggested the idea to an employee, and they have developed it into a workable proposition. Even your spouse, as an employee of the company, could make a suggestion and receive an award. Use your discretion to maximise awards to whom you think has earned them the most.