As we approach the end of the calendar year, most company directors will be looking at tying up loose ends before the start of 2022 and considering what bonuses and benefits in kind to pay out.
That’s especially true if your accounting period runs until the end of December, or if it’s recently come to a close.
As you review your company’s position at the end of the year with a clear view of your profits and losses, you’ll also need to think about directors’ bonuses. Giving bonuses allows you to reward yourself and any other directors in your company for your hard work, while also being tax-efficient in many cases.
Tax on directors’ bonuses
Cash bonuses are treated as earnings by HMRC. On one hand, that means you can deduct them from your company’s profits as a business expense, potentially reducing your corporation tax bill. It also means, however, that you’ll need to process them through PAYE in addition to your other earnings, deducting income tax and class 1 National Insurance contributions (NICs).
If you make this payment within the accounting period it relates to, deducting it as an expense should be relatively straightforward. But because many companies agree on bonuses at their annual general meeting (AGM) after the year-end, things can get a little more complicated.
The general rule is that to be counted as an expense for a particular accounting period, a bonus should be paid within nine months of the end of that period.
What counts as being ‘paid’?
‘Paid’ under these rules means not only has the cash changed hands, but that it has met certain conditions set out in PAYE legislation.
For directors, the date at which the bonus is paid is the earliest of:
- when the payment is made
- when the director becomes entitled to be paid
- when earnings are credited in the company’s accounts or records
- if the amount of earnings is determined before the end of the period, the date that period ends
- if the amount of earnings is determined after the end of the period to which they relate, the date the amount is determined.
As you can see, these rules are far from straightforward. To be absolutely sure which accounting period your bonus falls into, and the tax implications of that, talk to an expert – we’re here to help.
Tax on non-cash bonuses and benefits in kind
If you’re planning to take a bonus that’s not in cash form, such as a company car, company phone, a loan or some non-business entertainment, for example, a Christmas party, then different rules will apply.
You’ll need to follow the specific reporting rules depending on the type of item you’re receiving from your company. Some non-cash benefits in kind can be tax-free if they meet certain requirements, while others will incur tax and NICs.
You’ll need to report your benefits in kind using a P11D form. These are due by 6 July after the end of the tax year they relate to.
In some cases, you’ll also have to use PAYE if you give a non-cash bonus that’s easily convertible to cash – something like a voucher, or a share in the company, but if you’re giving out a christmas gift voucher of £50 or less to each employee this Christmas, these are classed as trivial benefits and don’t get taxed!
The tax rules around gifts and bonuses can be complex, but we’re here to help! If you need to talk through how to pay bonuses and reward your employees the most tax efficient way, you can book a call with one of our advisers by completing our contact form.
