A Guide To Employee Bonuses l Types, Tax, Legalities & More

    Offering your staff a bonus is an excellent way to reward them for their hard work over the course of the year. It helps to retain and incentivise staff for the period or year ahead and can also attract top talent to your business. 

    However, employee bonuses are not as simple as adding a could extra hundred or thousand pounds to an employee’s paycheck. As an employer, you need to understand the legalities regarding employee bonuses, as well as the types available and how they will be taxed should you award them. We explain this and more below. 

    What are the different types of bonuses?

    Employee bonuses can generally be classified into two categories, discretionary and non-discretionary. Employee bonuses are an important tool for supporting talent retention and acquisition. 

    Discretionary bonuses

    Discretionary bonuses are paid as per the employer’s judgement, and such bonuses are not included in an employee’s contract. Generally, discretionary bonuses are given as a reward for good performance once it has been achieved, often annually, and the bonus amount paid to the employee is flexible. 

    Non-discretionary bonuses

    These bonuses are awarded to employees based on predefined performance objectives. Thus, employees understand what is required of them in order to receive their bonus. This type of bonus is more likely to be included in a written employment contract and is paid at regular intervals throughout the year. 

    Additionally, if the company is struggling financially, but employees still fulfilled their criteria, you may still be legally obligated to pay out the bonus. 

    If you’re unsure whether you are required to pay bonuses or have doubts about whether you are compliant with Employment Law, feel free to get in touch. Our team of HR consultants are experts in this field and can assist you with any questions. 

    How are bonuses taxed?

    Taxes on bonuses will vary depending on whether it is a cash or non-cash bonus. Cash bonuses are considered as earnings; therefore, you would need to add it to the employee’s total earnings and deduct Pay As You Earn (PAYE) tax and Class 1 National Insurance from this value as you would normally do in your payroll. 

    Taxation on non-cash items is more complex as different rules apply depending on the thing given. For example, you will be required to pay PAYE tax on items that can easily be converted into cash. 

    Do bonuses have to be awarded individually? 

    No, as a company, you can determine how you wish to recognise performance and award bonuses. You can choose to give individual, team or company-wide bonuses, depending on which will best motivate your staff. They can also be used to create healthy competition within your organisation

    Individual bonuses are best used when motivating staff to attain personal goals, such as sales volumes. Team bonuses can be used if your company is split into teams or departments and will encourage team members to work together to achieve a collective goal.

    Company-wide incentives can be awarded based on excellent annual performance. These are most commonly given out at the company’s discretion, as various factors can influence a company’s financial position. 

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