Find out how HMRC taxes cash and non-cash bonuses for employees.
We will cover:
- How HMRC taxes bonuses
- What is a salary sacrifice and how it saves tax on bonuses
How are bonuses taxed in the UK?
Cash bonuses can be a great incentive to employees, and also of great benefit to employers as they increase productivity and morale.
HMRC sees cash bonuses as earnings, taxing them accordingly.
Therefore, if you’re paying a cash bonus to your employee, this is subject to tax and National Insurance Contribution (NIC).
There are, however, many non-cash bonuses that exempt you from paying tax.
Examples of non-cash bonuses which are tax free
- medical incentives
- retirement contributions
- health savings account
- non-financial bonuses such as
- …flexible work hours
- …the choice to work from home
- …the choice in which projects they want to work on
However, not all non-cash bonuses are tax free.
A common example would be medical and dental insurance.
So if you give these as a form of a non-cash bonus to your employees, you’ll be subject to paying 13.5% on the taxable value for class 1 NICs.
You can also have a look at the specific rules for each non-cash bonus item via the HMRC website.
As mentioned previously, bonuses are treated in a similar way to your regular income, as they are taxed according to your tax bracket.
If you earn between £12,570 and £50,270, your income, including bonuses, will be taxed at 20% and make NICs at 12%.
If you earn between £50,270 and £100,000, your income, including bonuses, will be taxed at 40% and make NICs at 2%.
You can choose a more fiscally efficient option of receiving your bonus by asking your employer to deposit it into your pension.
This is a salary sacrifice.
This way, you can receive your bonus free of tax or National Insurance.
Employees can choose to make a salary sacrifice partially or in full.
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