It is often said that your staff are your most valuable assets, and indeed your long-serving employees may know as much about your business as you do. So why not take advantage of that knowledge, and some tax breaks, to improve your profits?

If you set up a suggestion scheme for your staff you can offer tax-free encouragement rewards of £25 for every good idea, and give up to £5,000 tax-free for each brainwave that generates a real financial benefit for the business. There is a limitation that one employee cannot receive more than £5,000 in reward for one suggestion, although a reward may be split between a number of employees if they jointly contribute to an idea.

To pay over £25 tax-free the idea must be implemented and the reward must be linked to the expected financial benefit. The total amount of the reward must not exceed 50% of the expected net financial benefit during the first year of implementation, or on the same basis 10% over five years.

For example, suppose a member of your team suggests an idea for a new product combination and to reward that employee for the idea, and to encourage similar ideas, you decide to award him or her £4,000 under the conditions stated above. In this case, the cost to the employer is £4,000 and the net received by the employee is £4,000. If however you rewarded the same employee with a normal bonus, then depending on the employee's tax code, the cost of paying £4,000 net of tax, including NICs, could be as much as £8,000.

You are not required to register the suggestion scheme with HM Revenue & Customs or inform the tax authorities when you make a reward. However, you should keep a record of how you calculated each reward and draw up some rules for the suggestion scheme as it applies in your business.

Traps to avoid

The basic rules of your suggestion scheme can be very simple, but the scheme must be open to all your employees on equal terms and not restricted to a select group, such as the directors or managers. The suggestions must be of a nature that is outside of employees' normal duties and area of responsibility. So if you employ an 'ideas man' to research potential new products for your company, when he comes up with a new product line, that idea cannot be rewarded tax-free from the suggestion scheme, as product development is part of his job.

Another general rule is that the suggestions must not be made at a meeting that is held for the purpose of generating ideas, such as a brain-storming lunch. So the best policy might simply be to leave a well marked suggestion box in the staff room, with a copy of the suggestion scheme rules pinned to the notice-board.

For more information about these and other tax saving strategies, contact us.