How Are Bonuses Taxed In The UK?

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In this article, we answer common questions about bonuses and how they are taxed in the UK. 

What is a bonus?

A bonus is any additional financial or non-monetary remuneration an employer provides their employee on top of their regular salary. Bonuses are typically offered to individuals who have performed very well at work. 

Bonuses can be offered as a reward for an employee who has stayed with the company for a certain period of time (a loyalty bonus). They can also be given to shareholders’ employees in the form of a bonus share issue, which is a free offer of additional shares.

In today’s job market, where job opportunities are becoming more competitive and talent is difficult to come by and keep for extended periods, bonuses can be a really valuable addition to a company’s entire compensation package. If offered, they can make a business much more attractive to potential employees. 

Bonuses can be given to employees regardless of their role or level of experience in the company.  

As a business owner, what do you have to report and pay?

If providing bonuses to employees, you must be sure to tell HMRC. As an employer, you have certain tax, National Insurance, and reporting obligations you must adhere to (whether they are cash or non-cash bonuses). 

As an employer, you include the bonus amount as part of your payroll expenses when computing corporation tax so that it reduces profit before tax. 

Cash bonuses vs non-cash bonuses 

Cash bonuses, including vouchers exchangeable for cash, count as earnings, so you – as an employer – will have to add it to the employee’s other earnings. You will then have to deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance through payroll. 

For non-cash bonuses, there are different rules on reporting and payment depending on the item you give. If you are giving something that an employee can easily convert into cash, you may have to use PAYE when giving some non-cash bonuses. 

Are there any tax-free bonuses?

There are a small number of non-cash bonuses that you can give employees that are not counted as part of their earnings and therefore are tax-free. Some tax-free bonuses include some medical checkups, pension contributions, charity donations, non-financial bonuses such as choosing which project to work on, and training. 

However, not all non-cash bonuses are tax-free. Company cars, for example, are taxed when employees use them outside of work or for commuting. The amount of tax payable can be calculated by working out the value of the car and its emissions but is capped at 37%. Shares and recreational activities are also taxed. To find out whether your bonus would be tax-free or not, HMRC has a complete guide you can read. 

Bonuses vs trivial benefits

Trivial benefits are gifts to employees that cost £50 or less to provide, are not cash or a cash voucher, a reward for their work, or in the terms of their contract. Employers do not have to report these benefits to HMRC as you do not have to pay tax or National Insurance on them. 

Some trivial benefits include treating employees to lunch or food and drink, buying small Christmas gifts, or cake and chocolates to mark an occasion. 

How to choose the right bonus for your employee

As an employer, choosing the right bonus for your employees and your business is important. Make sure to research different options and always read the small print. You could also speak to your employees directly about which type of bonus they might appreciate the most and that would best work for them. 

Be sure to speak to your accountant, or a professional in the field, who may also provide you with valuable advice on how to implement bonuses in the workplace and avoid being non-compliant. The last thing you want is for your business to experience legal issues through accidental tax avoidance.

If you want help with deciding what bonuses are best for you, your business and your employees, talk to us.

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