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Bonus and incentive schemes — legal points

Bonus and incentive schemes - legal pointsMany employers operate bonus or incentive schemes in addition to paying basic salaries to their employees. Such schemes will normally make it clear whether entitlement is discretionary or contractual.Discretionary bonuses usually give employees a contractual right to be considered for a bonus or incentive payment under the scheme, but not necessarily to receive one. In the absence of express agreement a bonus entitlement may be implied on the basis of established custom and practice, eg a right to be paid a Christmas bonus may be implied where it has been paid to all employees for a number of previous years (see Frischers v Taylor (unreported EAT 386/79)).Any bonus entitlement should be included in the employees' written statement of employment particulars. See the Written statement of particulars or terms and conditions and Definition of wages guidance notes. Bonus schemes are generally intended to ensure that employees focus their efforts on key objectives of their employer's business. The benefit for the employee is that he may receive greater financial reward. The benefit for the employer is that employees are motivated to work harder and not lose their bonus entitlement by leaving employment.Where a bonus is paid in cash, it is liable to PAYE tax and Class 1 national insurance. Bonuses paid in kind are taxable in accordance with the benefit in kind rules.Types of schemeMost bonus schemes link bonus payments to some measure of performance. In this way they can be used to motivate employees.

Fixed deductions for expenses

Fixed deductions for expensesIntroductionIn certain circumstances, HMRC can agree an appropriate fixed rate amount (also called a flat rate expense) which can be deducted from earnings for tax purposes. These typically refer to certain classes of employees who are required to incur expenditure on things such as tools and clothing.For example, firefighters are entitled to a flat-rate allowance on the costs of cleaning and maintaining their uniforms where laundry services are not provided by their employers.These amounts should not be confused with round sum allowances which are discussed in the Round sum allowances guidance note which are generally treated as taxable income for the employee.Fixed deductions do not include the approved mileage rate for business travel using the employee’s own car. This is treated as business travel, see the Fuel-related payments / mileage payments guidance note.Fixed rate deductionsHMRC can agree fixed sum deductions that are negotiated with trade unions to apply to certain classes of employees. These are rates that employers may pay free of PAYE and reporting requirements, or that an employee may claim as a deduction where the expense is not reimbursed by the employer. These fixed rates are generally agreed in instances where it is burdensome for an employer or employee to administer expenses and the associated record keeping, eg where they have particularly large numbers of small payments. The fixed rate deduction covers the repair and replacement of clothes and equipment of certain classes of employees in certain types of industries. The full list of

Holiday pay

Holiday payIntroductionAs with any other cash payments to an employee, holiday pay should be included in payroll, and is subject to tax and Class 1 NIC. The key consideration is the timing of the payment to the employee and the impact that this has on the timing of the deduction of tax and NIC. Guidance on this subject is in HMRC’s CWG2 section 2.7.4.For employment law implications relating to holiday pay, please see the Holiday pay guidance note. For more on tax on holiday, see Simon’s Taxes E4.1113 and for NIC, see Simon’s Taxes E8.257. HMRC guidance starts at NIM09100.Normal payment timesIf an employer continues to pay the employee at the usual time, then the employer should continue to deduct PAYE and Class 1 NIC in the normal way.See Example 1.Payment in advanceIf the employer pays a weekly-paid employee in advance of a period of holiday, the PAYE procedures depend on whether the employee is on a cumulative tax code or a Week 1 tax code. See Example 2.The same principles apply to monthly-paid staff, but it is much more usual for monthly paid staff to be paid holiday pay at the normal payment time.Cumulative tax codeIf the employee is on a cumulative tax code, calculate and record tax to be deducted under PAYE as if the payment was being made on the payday for the last week of the holiday period.Typically, this will happen where individuals are paid weekly and have worked for a sufficient period of time

Remittance basis ― overview with employment focus

Remittance basis ― overview with employment focusKey points•provided certain conditions are met, Overseas Workday Relief (OWR) can be an extremely valuable form of tax relief for non-domiciled individuals who perform employment duties both in the UK and overseas•Up to 2024/25 OWR is only available in the tax year of arrival and subsequent two tax years following a three year period of non-residence•OWR is generally calculated by reference to the percentage of days an individual spends working overseas•a bank account which qualifies for the special mixed fund rules allows for all offshore transfers to be treated as one single transfer for the year and all remittances as one single remittanceAbolition of non-UK domicile basis of taxation from 6 April 2025The non-UK domicile basis of taxation is withdrawn from 6 April 2025, From that date, OWR is replaced with a new system of foreign income relief. Details of the new relief qualifying conditions, and of the transitional provisions for those who do not qualify under the changed rules, are provided in the separate Overseas workday relief and Abolition of the remittance basis from 2025/26 guidance notes. Introduction ― the remittance basisThe default position for employees who are resident in the UK for tax purposes is that they are chargeable to income tax on their worldwide income and gains. Where an individual is not domiciled in the UK, they may be eligible to claim the remittance basis of taxation. For an individual who has been UK resident for

Directors

DirectorsMost of the rules concerning tax on employment income and National Insurance apply to company directors in exactly the same way as they do to general employees. Unless otherwise stated, when the guidance notes in this module talk about 'employees' this includes both directors and employees.The rules on the national minimum wage (NMW) / national living wage (NLW) do not apply to company directors unless they provide work or services to the company under a contract of employment (see the National minimum wage ― overview guidance note).This guidance note is concerned with the instances where special tax or NIC rules apply to directors.Income taxWho counts as a director?Although in many cases it is obvious that an individual is a director, eg because their job title says that they are, there is a definition in the legislation on employment benefits that includes a range of people who may not normally be described as directors. It specifically includes anyone who manages the affairs of a company alone, is a member of a board of directors or similar body which does so, or is a member of a company whose affairs are managed by its members. If the directors (as described above) usually act under the direction or instruction of another individual in managing the affairs of the company, that other individual also comes within the definition of director for the purposes of the benefits code. Such an individual is sometimes known as a 'shadow director' but for the purposes of the

Apprenticeship levy

Apprenticeship levyIntroductionThe apprenticeship levy was introduced in Finance Act 2016 and applies as from 6 April 2017. The rate of levy is 0.5 % of paybill, offset by a £15,000 ‘levy allowance’. This means that, in effect, it applies only to employers who have an annual paybill of £3 million or more a year. The apprenticeship levy payment regime is administered by HMRC as part of the RTI system, alongside PAYE tax and NIC.The money raised by the apprenticeships levy goes into a special training fund which is topped up by government with the aim that it can be accessed by all employers to help meet the training and assessment costs of apprenticeships.Payments of the apprenticeship levy are deductible in computing the employer’s profits for tax purposes.For further reading, see Simon’s Taxes E4.11130–E4.11302.Who has to pay the levy?The apprenticeship levy is payable by employers, in this content this means anyone who is a secondary contributor in respect of employed earner(s) for Class 1 NIC purposes. Potentially all employers have to pay the levy, but the levy is offset by a levy allowance of £15,000. As the levy is 0.5% of the employer’s paybill, only employers whose annual paybill is £3 million or more will actually have any liability to pay the levy.An employer’s paybill means the total amount of employees’ earnings that are subject to Class 1 NIC (this includes any earnings below the secondary threshold even though no NIC is likely to have been deducted on such sums,

PAYE obligations

PAYE obligationsSTOP PRESS: The remittance basis is to be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in Finance Bill 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.Coming to work in the UKAn employee is subject to income tax if he is resident or carrying out employment duties in the UK. Just one day of work in the UK can result in a UK tax liability for the individual. It can also result in pay as you earn (PAYE) obligations for the employer. See the Setting up a payroll and Employees starting and leaving ― payroll consequences guidance notes.PAYE obligationsUnder normal procedures an employer is required to consider the status of any individual performing work on their behalf. See the Employment status ― why it matters guidance note. Payments to employees are required to be made under the PAYE regulations. However, registration is not required for an employer PAYE scheme if all employees are paid below the national insurance threshold (lower earnings limit) and do not have another job. Under real time information (RTI) reporting, an employer is required to operate PAYE, where at least one employee is earning at least the lower earnings limit, in which case all payments of earnings to all employees must be reported

PAYE on readily convertible assets

PAYE on readily convertible assetsIntroductionWhere a share incentive plan is operated, the company may have obligations to account for income tax and NIC via the PAYE system if there are gains made in connection to employee shares. This will be the case where the shares meet the definition of a readily convertible asset (RCA). It is therefore crucial to understand the definition of an RCA to avoid errors and underpayments which can attract penalties.See Simon’s Taxes E4.1124Definition: what is a readily convertible asset?The statutory definition of an RCA is given in ITEPA 2003, s 702. There are 9 types of asset within that definition. An asset:•capable of being sold or otherwise realised on a recognised investment exchange•capable of being sold or otherwise realised on the London Bullion Market•capable of being sold or otherwise realised on the New York Stock Exchange•capable of being sold or otherwise realised on a market for the time being specified in PAYE regulations•consisting in the rights of an assignee, or any other rights, in respect of a money debt that is or may become due to the employer or any other person•consisting in property that is subject to a warehousing regime, or any right in respect of property so subject•consisting in anything that is likely (without anything being done by the employee) to give rise to, or to become, a right enabling a person to obtain an amount or total amount of money that is likely to be

Employee personal liability for PAYE or NIC

Employee personal liability for PAYE or NICUnder the Taxes Management Act 1970, an individual is under a general legal obligation to inform HMRC of changes in their personal circumstances that may affect their tax status or the amount of tax that is due. The introduction of self assessment under Finance Act 1994 and Finance Act 1995 resulted in employees having to take responsibility for their PAYE affairs as well as their other financial circumstances which may give rise to an additional income tax liability (or claim for a refund) or capital gains tax, etc.For employees, their tax situation is often straightforward and the correct amount of income tax is deducted via the PAYE system. However, there may be circumstances where too little tax has been deducted by the employer from the employee’s pay. Establishing the obligation to pay personal tax dueIf a tax underpayment arises, it may be necessary for HMRC to establish which party is responsible for this. As a starting point, it should be recognised that PAYE is not an exact process, rather it is intended to be a deduction made on account of an employee’s personal tax liability. The actual tax due may well differ from the PAYE tax, deducted correctly by the employer; if so the employee will be liable to pay any extra tax due. For example, this often happens if the individual has multiple concurrent sources of income, if the PAYE system is unable to recognise the correct personal allowances or tax rate

A–Z of payroll

A–Z of payrollUnderstanding payroll terminology and establishing the correct tax and NIC treatment of paymentsThis note provides an alphabetical summary list of many of the common terms encountered by those operating a payroll. It also provides appropriate signposting, showing where additional guidance may be found Additional published official guidance, includes HMRC’s CWG2 further guide to PAYE and National Insurance contributions, which summarises the department’s technical views of how most payments should be treated.For additional reading on payroll matters, please refer to Simon’s Taxes, division E4.11.For new or smaller employers the Employer obligations for those running a small payroll guidance note may also be of use.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.Payroll term or paymentFurther detailsReferencesAAbsences ― holiday payAn employer has a statutory obligation to pay holiday pay, and the general expectation is that this should be made at the employee’s normal pay rate. The statutory minimum in the UK is 5.6 weeks holiday pay per year, including bank holidays (pro-rated for part time staff). However employees may have additional rights, eg under their employment contract Holiday pay ― legal pointsAbsences ― statutory payments, maternity pay, paternity pay, adoption pay, shared parental leave pay and parental bereavement pay (SMP, SPP, SAP, SSPP and SPBP)An employer is obliged to make statutory payments to employees, if they fall within certain qualifying criteria covering parenthood or child bereavement. All statutory payments are paid