Some employers like to give a bonus as recognition of a good job done and forget to take into consideration that it is taxable income. A bonus, whether paid in cash or electronically is earnings as you are giving your employee payment in appreciation of their work.
Earnings include basic pay, overtime, bonuses, holiday pay owed for a leaver, car allowance, etc.
All these earnings must have tax and NI deducted from them and are shown as an addition to the employees' normal pay on their payslip. We advise all the employers we work with the payments to employees that they need to tell us about when they they provide payroll information.
The shock comes to the employer when they realise it will cost them far more than they planned. At that stage the payment is grossed up for each employee so that they receive the amount within their pay that they have already been paid. The employer then has to pay the employees' tax, NI and pension contribution as well as their own employers NI and pension contribution.
Often we only find out a bonus has been paid when we do the accounts and of course we don't do accounts for all our payroll clients so can't make employers aware of the consequences or put right every situation.
It becomes an expensive mistake.
To avoid this, decide the bonus you want to pay, tell your payroll provider and the employee will receive the net amount of the bonus in their pay. The net amount will vary according to their tax code which is why it is never wise to say you want them to receive a set amount in their net pay. Some employees have tax codes which will mean you paying significantly more than you might expect to to achieve the net pay you want.
There is an alternative.
Gifts of up to £50 per employee can be given as they are considered "trivial" by HMRC and there is no tax or NI due on these. Gift cards can also be given but not vouchers which can be exchanged for cash. These would have to be added to pay as earnings or reported on a P11D (Expenses and Benefits) after the end of the tax year.
Gifts are often appreciated more as a £50 gift is significant whereas £50 cash with tax and NI deducted could leave just £34 for a standard rate tax payer.
Before you reward your employees.....
Consider the most tax efficient way for them and for your business.
If you are an employer you can find out more information from HMRC about the implications of paying bonuses and giving other benefits to your staff. It is worth knowing what you can do to avoid your employees receiving a tax bill at a later date or you being fined for not treating the bonus as earnings.
Paying casual staff
If you have a payroll all your staff must be included on it. Staff who receive occasional payments, whether in cash or electronically, must have these payments put through the payroll in case there is any tax or NI to be deducted. It is the only way you can be sure that neither you nor the employee will receive a request for unpaid tax and NI from HMRC further down the line. And your employee may not be working just for you and in this case tax and NI would almost definitely be due.