It is the time of year when employers are considering paying bonuses to their employees but many don't realise the implications of either not putting it through the payroll or committing to paying a net pay amount.
Any payment made to an employee which is extra to their normal pay is subject to a tax deduction and both employers' and employees' National Insurance contributions. If the employee and/or you, the employer, contribute to the pension scheme pension contributions can also be deducted but this will be dependent on whether the pensionable earnings are total earnings or qualifying earnings.
Employers pay bonuses in recognition of an employee's work and like to think that the amount they want to pay is the amount the employee should receive. But because a bonus is always subject to deductions the employee will receive less than the proposed amount. Bonuses must always be put through the payroll if you have a payroll.
Some employers ask us to increase the employees' net pay by a set amount so that they receive the bonus that they want them to have. The problem with this is that the cost to the employer may be significantly higher than they expect as they will have to pay the employees' tax, their NI and pension contributions as well as their own NI and pension contributions. The actual cost, if you choose to pay a net pay bonus, could come as quite a shock!
You may decide to give every employee a £200 bonus. Some employees may receive all of this amount without deduction because they haven't earned enough during the year to pay tax or NI. Some employees may have opted out of the pension scheme so will not have any pension contribution deducted so their net pay will be greater than those who contribute to a pension scheme. Some employees may be over retirement age and therefore not pay NI contributions so their net pay may only have tax and a pension contribution deducted. Some employees may not have a standard tax code and therefore pay more or less tax than the majority. The net amount an employee receives can vary greatly for all these reasons which relate to their own personal circumstances.
We therefore always recommend employers decide the bonus they want to pay before deductions as they will know the total cost and will not be paying tax, NI and pension contributions on behalf of their employees. The employee will see the gross amount of the bonus on their payslip and any reduction of that amount will be due to their tax code, NI and pension contributions.
Additional payments made without deduction would be for reimbursed expenses, but only for the exact amount of those expenses, or for mileage at or below the standard HMRC rate. We generally recommend that these types of reimbursements are made outside of the payroll as they are not subject to tax, NI or pension deductions.
We support all our payroll clients with calculating the cost to them of making bonus payments and will help them decide the best option for the employees they have.
If you would like help with your payroll and support from our friendly payroll team, please contact us for more information.
