If I give one of my employees a bonus, do I have to tell HMRC and pay tax on it?
Bonuses are useful ways of rewarding employees who have performed well at work, or who have stayed with you for a certain length of time. What’s more, in today’s work environment where job opportunities are becoming increasingly competitive and talent can be hard to find (and keep), they can be an attractive part of your overall compensation package.
But remember, any compensation you give to your UK employees over and above their base pay or salary is usually subject to tax and national insurance, and you must tell HMRC about it. This includes all cash and non-cash bonuses.
What is a bonus payment?
A bonus is any cash or non-cash compensation you give an employee in additional to their normal pay. In most cases, bonuses are given to employees who have performed exceptionally in their work. You can also offer bonuses as incentives to prospective staff to increase employee retention.
Bonuses can also be distributed to shareholder employees via a bonus share issue – an offer of free additional shares.
The tax treatment of cash bonuses in the UK
For you, the employer
As an employer, you bear certain tax obligations when giving cash bonuses. You’ll need to notify HMRC of the bonus amount, and add the bonus to your employee’s other earnings and deduct income tax via PAYE as well as Class 1 National Insurance Contributions (NICs) through your payroll. You will also need to pay employer’s NICs on the bonus amount.
When calculating corporation tax, you add the bonus amount to your payroll expenses so it gets deducted from your revenues as an expense of the business.
For your employee
Your employee will receive the bonus amount net of income tax and NICs.
If you’re offering non-cash bonuses or additional compensation, such as a private health scheme or a company car, there are different rules to follow depending on the type of bonus you’re offering.
For example, if you offer your employees private medical and dental insurance as a bonus, this is considered a ‘benefit-in-kind’ and you must pay class 1A NICs at 13.8 percent on the taxable amount (that means the value of the benefit in real terms). You also need to report this to HMRC.
Certain health benefits are exempt from tax:
- One medical check-up per tax year
- Eye tests, glasses, and contact lenses if your employees use monitors or screens at work
- Overseas medical treatment for your overseas workers
- Treatment or insurance for work-related injuries and ailments
- Medical treatment of up to £500 that is part of a return-to-work plan
If you provide your employees with company cars as a form of bonus and they can use the car outside of work and for commuting, then you must report this to HMRC. Your employee will pay tax on the value of the car – this is calculated with reference to the list price and emission level, cars with high levels of emissions are taxed more heavily than cars with low emissions. You can find out how much tax is payable using the HMRC Company Car and Car Fuel Benefit Calculator.
HMRC also has an Expenses and benefits: A-Z guide to many types of non-cash bonuses to help you figure out what tax and NICs are payable.
Bonuses are a great way to reward your employees, but make sure you stay on the right side of HMRC to avoid problems down the line.