Staff suggestion scheme awards: tax free limits

Q: What conditions must the scheme and the suggestion meet?

Section 321 and EIM06610 set out the conditions: The scheme: it must be open on the same terms to employees of the employer generally, or to a particular description of them. EIM06610 gives the example of a scheme open to everyone in a particular building or geographical area. Condition A: the suggestion relates to the activities carried on by the employer. Condition B: the employee could not reasonably be expected to make it in the course of the duties of the employment, having regard to the employee's experience. Condition C: the suggestion is not made at a meeting held for the purpose of proposing suggestions. The award: it must be an encouragement award or a financial benefit award, as defined in section 321(6). Condition B is where most disputes arise. A process engineer whose job is improving production methods would usually be expected to suggest a better production method. The same idea from a warehouse operative is far more likely to be outside their duties. The test looks at the individual's role and experience, not at how good the idea is.

Awards under a staff suggestion scheme are exempt from tax and National Insurance up to £25 for an encouragement award and up to £5,000 for a financial benefit award, provided the scheme and the suggestion meet the conditions in section 321 ITEPA 2003. The suggestion must be outside the employee’s normal duties and must not come from a meeting held to generate ideas. Anything above the limit is taxed as earnings through payroll.

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Are suggestion scheme awards normally taxable?

Yes. HMRC’s Employment Income Manual at EIM06600 says an award made under a staff suggestion scheme is generally taxable as earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), or as a benefit under section 203. The exemption in section 321 replaced Extra Statutory Concession A57 from 2003 to 2004 onwards, keeping much the same conditions but adding rules for awards made more than once for the same suggestion.

GOV.UK guidance for employers confirms that qualifying awards within the limits carry no tax, National Insurance or reporting obligations.

What conditions must the scheme and the suggestion meet?

Section 321 and EIM06610 set out the conditions:

The scheme: it must be open on the same terms to employees of the employer generally, or to a particular description of them. EIM06610 gives the example of a scheme open to everyone in a particular building or geographical area.
Condition A: the suggestion relates to the activities carried on by the employer.
Condition B: the employee could not reasonably be expected to make it in the course of the duties of the employment, having regard to the employee’s experience.
Condition C: the suggestion is not made at a meeting held for the purpose of proposing suggestions.
The award: it must be an encouragement award or a financial benefit award, as defined in section 321(6).

Condition B is where most disputes arise. A process engineer whose job is improving production methods would usually be expected to suggest a better production method. The same idea from a warehouse operative is far more likely to be outside their duties. The test looks at the individual’s role and experience, not at how good the idea is.

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How much can an encouragement award be?

An encouragement award is an award, other than a financial benefit award, made for a suggestion with intrinsic merit or showing special effort (section 321(6)). Section 322(1) sets the permitted maximum at £25. EIM06620 confirms the figure. Encouragement awards suit ideas that are good but not adopted, or adopted without a measurable saving.

How is the financial benefit award limit worked out?

A financial benefit award is 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. Under section 322(4) and (5), the suggestion maximum is the lower of £5,000 and the “financial benefit share”, which is the greater of:

half the financial benefit reasonably expected from adopting the suggestion in the first year after adoption, and
one tenth of the financial benefit reasonably expected in the first five years after adoption.

EIM06630 describes the result as the maximum the employer can pay tax free for a single suggestion. The calculation depends on the employer’s reasonable expectation at the time, so it is worth keeping the business case or savings estimate that supported the award.

Illustration only. An employee suggests a change to delivery routes that the employer adopts and expects to save £3,000 in the first year and £20,000 over five years. Half the first year saving is £1,500 and one tenth of the five year saving is £2,000, so the financial benefit share is £2,000. That is below £5,000, so up to £2,000 can be paid tax free. If the employer pays £2,500, the extra £500 is taxable.

What if several people share a suggestion or awards are paid in stages?

Section 322(2) deals with two or more awards for the same suggestion made on the same occasion, for example where a suggestion is submitted jointly. The suggestion maximum is shared in proportion to the awards. HMRC’s example at EIM06641 has awards of £2,000 to A and £1,000 to B with a suggestion maximum of £4,500. A’s share of the maximum is £3,000 and B’s is £1,500, so both awards are fully exempt and £1,500 of the maximum is left for any later award.

Section 322(3) covers later awards for the same suggestion. EIM06650 explains that the suggestion maximum is set against the earliest awards first, and any balance is carried forward. In the EIM06651 example, with a suggestion maximum of £4,000, an award of £2,500 is fully exempt, and a second award of £2,500 for the same suggestion is exempt only up to the remaining £1,500, leaving £1,000 taxable in the later year.

What if an employee makes more than one suggestion?

Each suggestion is looked at separately. EIM06660 says the permitted maximum for a later suggestion is not reduced because the employee has already had an exempt award for a different one. A prolific contributor can receive several exempt awards in the same year, provided each suggestion qualifies on its own.

What happens to the excess or to a non qualifying award?

GOV.UK says that where awards exceed the limits, the extra counts as earnings and the employer must report it and deduct PAYE tax and National Insurance through payroll. Section 321(2) only exempts the award “if, or to the extent that” it does not exceed the permitted maximum, so only the excess is taxed.

An award that fails the conditions is different. EIM06670 says it is taxable in full, for example where the suggestion came from a meeting held to propose suggestions. Making such an award does not disqualify the whole scheme: other awards that meet the conditions stay exempt up to their limits.

What mistakes do employers make?

Rewarding ideas from brainstorming sessions, innovation days or workshops held to generate ideas, which fail condition C.
Paying awards to staff whose role is to make the kind of improvement suggested.
Running a scheme open only to selected individuals rather than to employees generally or a defined group.
Paying the full £5,000 without a reasonable estimate of the saving to support it.
Applying the £25 encouragement limit per employee per year. It applies per award, under section 322(1).

Suggestion awards often sit alongside other recognition, such as long service awards, trivial benefits and gift vouchers and cash gifts, each with its own rules. Taxable awards in kind are reported as explained in our guide to benefits in kind and the P11D, and incentive payments are a common area for review in an HMRC employer compliance check.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.