Whilst dividends often represent the more tax-efficient method for extracting profits from a company it may not always be possible or desirable to take out income is this manner, for example, if a company is loss making or if profits are not to be paid to all shareholders. Instead a company may seek to pay a bonus to reward its key employees.
The end of a company’s accounting period is often the time when bonuses are declared, however care needs to be taken when including a bonus in order to obtain a corporation tax deduction. Without the appropriate administrative planning this could also trigger an obligation to pay income tax and national insurance (NI) even where the intention is not to pay the bonus until after the year end.
In order to obtain a corporation tax deduction for a bonus included in year-end accounts there must be a an obligation to pay that bonus. An obligation will exist at the accounts date if the bonus has been voted for in principle before the accounting year end even if the timing and method are determined at a later point.
It should also be noted that to qualify for a corporation tax deduction in the accounting period that the bonus relates to, the actual payment must be made within nine months of the end of the accounting period. If the bonus is not paid within nine months then corporation tax relief is instead allowable in the accounting period in which the payment actually occurs.
In addition to the above, consideration must be given to when the PAYE and NI liability is triggered on the bonus. It is usually expected that this would be when the bonus is processed via the PAYE system however there are very specific rules which determine the point at which PAYE and NI become payable.
A decision to award a bonus does not trigger the PAYE obligation. Instead a bonus will be treated as ‘paid’ for income tax and NI purposes on the date that the employee has an enforceable right to receive the money. This will be the earlier of:
- The date it is credited in the company accounts, for example to a directors loan account;
- The end of the accounting period if the amount has been determined by then;
- The date the value of the bonus is determined if after the end of the accounting period;
- The date payment is physically made;
- The date the employee is legally entitled to receive payment.
As a bonus does not have to be paid until nine months after the end of an accounting period a company can include an accrual for an estimated bonus prior to the year-end, having agreed it in principle. Once the final profit figures are known the actual bonus can be calculated after the year end and it would be at that later date that the income tax and NI would become due.
A further consideration for those intending to include a bonus in the company accounts that will not be ‘paid’ until after 6 April 2022, is to ensure that the accounts reflect the fact that employers NI will increase from the current 13.8% to 15.05% on payments after that date.
If you have any questions regarding the declaring and paying of director or employee bonuses and the timing of the PAYE and NI liability, please speak to your usual contact at the firm.
Our Current working arrangement – We remain ‘Open for business’
Our staff have now returned to mainly office based working, whilst continuing to work from home at other times. They can still be contacted in the usual way either via email or by calling the office number where reception will divert your call to the appropriate staff member.
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