By Thomas Julier, Accountant at Hive Business.
Many employers are now opting to pay one-off bonuses to their staff instead of giving raises. This is due to a bonus being an optional or repeating event whereas a pay rise is permanent. It is also thought that a bonus has an immediate positive effect on the employees that outweighs that of a pay rise. Employee bonuses are a great incentive for employees, but before you decide to award them make sure you are fully aware of the tax implications first – both to you and your employee.
A bonus is a special one-time or annual payment to an employee for some special purpose. Whilst the bonus is an additional payment beyond the salary or hourly rate of pay for the year, it should still be run through the company’s payroll scheme (not just through the petty cash). You can decide who receives a bonus, the amount of a bonus, and when it is paid.
COST TO THE EMPLOYER
It should also be decided whether a bonus is going to be net or gross as the cost to the company will vary substantially, for example, a bonus of £1,000 to a basic rate taxpayer will have the following difference:
£1,000 Gross bonus
The cost to the employer for a £1,000 gross bonus would be the £1,000 plus Employers National Insurance at 13.8% (£138) and Employers Pension at 3% (£30) so the total cost of a £1,000 gross bonus is £1,168.
£1,000 Net Bonus
The total cost to the employer in order for the employee to receive an additional £1,000 in their pocket is £1,825 (based on a basic rate taxpayer with a standard pension scheme) the following is a breakdown in costs
- Gross Pay – £1562.50
- Employees National Insurance (12%) – £187.50
- PAYE (20%) – £312.50
- Employee Pension Contribution (net of tax relief) – £62.50
- Employers National Insurance (13.8%) – £215.63
- Employers Pension Contributions – £46.87
Therefore, as with the gross pay above the total cost to the employer is the gross pay plus Employers NI plus Employers Pension Contributions totalling £1,825.
As you can see from the above calculations the difference in cost of the two bonus types is substantial. Don’t rush into any decisions when it comes to bonuses as that cash Christmas bonus could end up costing the company a lot more than you initially intended when (not if) it gets put through the payroll.
£50 Trivial benefits
If the bonuses you are considering are not of such a substantial nature it is worth considering whether it can be deemed a gift. More information on this can be found here.