Many employers are now opting to pay one-off bonus payments to their staff instead of giving raises. This is because a bonus is an optional 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.
What does a bonus mean?
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 petty cash). You can decide who receives a bonus, the amount of the bonus, and when it is paid.
How much will an employee bonus scheme cost?
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. You should also consider company performance before you start dishing out too many bonus payments. Make sure you reward employees in a way you can afford.
Non-cash bonus schemes
There are many ways to reward employees with non-cash bonuses. One popular option is to offer additional time off, such as an extra holiday bonus or a paid day off. Another option is to provide training or development opportunities.
Recognition programs, such as employee of the month or a peer-nominated award, can also be a great way to show appreciation for your staff. Other non-cash bonuses can include flexible work arrangements or perks such as a company car or a parking spot. It is important to consider the preferences, values and individual performance of your employees when choosing a non-cash bonus, as different people may value different things.
Are employee bonus schemes a good idea for your business?
Employee bonuses are a great way to show appreciation for your staff’s hard work and dedication. However, it is important to consider the tax implications, as well as the cost to the company before deciding to award bonuses. It’s also worth noting that non-cash bonuses, such as extra time off or training opportunities, can be a great way to reward employees in a way that aligns with their preferences and values. It’s always good to make sure to have a fair and transparent process to decide who gets the bonuses e.g. how much and when. This will help to ensure that the bonuses are seen as fair and that the employees feel valued and motivated.
