What Employers Need to Know About Bonuses in England

As an employer, you may consider paying staff bonuses as an incentive and reward to your employees. These bonuses are additional to your employee’s existing wages or salary and, as a result, can have varying legal considerations. Notably, these implications arise primarily from how you choose to structure your bonuses, which requires you to pay attention to transparency and issues such as taxation. This article will explain what employers need to know about bonuses in England. 

What Are Bonuses?

Broadly, bonuses are either short-term payment schemes or a form of performance-related pay. In practice, employers pay bonuses in addition to an employee’s regular salary to congratulate them for past performance and incentivise their future performance. You may choose to award bonuses based on an individual’s or team’s performance. 

Bonuses may be in the form of money or as a non-cash award such as :

• time off work;
• vouchers;
• gifts; or 
• shares in your business.

There are other types of performance-related pay and incentives, such as:

• commission;
• tips;
• gratuities; and
• other incentives such as perks and rewards, for example, a holiday or a gym membership.

Why Pay Your Staff Bonuses?

Paying your staff an incentive performance-related pay such as a bonus has advantages for your business. It can encourage, for example:

• higher productivity;
• staff appreciation;
• a positive working environment;
• greater retention; and
• better teamwork.

You may select a particular time of year when you pay them. For example:

• before a holiday period;
• when a large project comes to an end;
• after your employees’ annual performance reviews; or
• if your employee referred a new employee to you.

You may also pay your recruits a bonus to negotiate a contract to bring them on board your business called a sign-on bonus.

What Are the Types of Bonuses?

The table below outlines various types of bonuses and explains their unique qualities.

Legal and Commercial Considerations

When paying your staff any type of incentive payment, there are points you need to consider, such as:

• whether they are transparent;
• whether they are of value to your staff; and
• what the tax implications are for your staff.

If you do not construct your bonus schemes carefully, your staff may feel demoralised and not motivated to do their job well. 

You should also consider whether you offer discretionary or contractual bonuses. Bonuses are usually discretionary, which gives you flexibility as an employer. However, you must show that you:

• honour the implied trust and confidence, which is a legal requirement between you and your employees; and 
• do not exercise discretion “in an arbitrary, capricious or irrational way.”

A contractual bonus is where the bonus is part of your employee’s terms and conditions. This means that you have little flexibility and are obliged to pay it. If you do not, an employee could claim against you for breach of contract. 

Tax Considerations 

As an employer, you should also know that you have tax and National Insurance reporting obligations if you pay your staff bonuses. This applies regardless of whether the bonus is a cash one or a non-cash bonus. Where it is a cash bonus, it is considered the earnings of your employee, so Pay As You Earn (PAYE) tax and Class 1 National Insurance contributions need to be paid through your regular payroll. For non-cash bonuses, the rules vary depending on what the bonus is.

Key Takeaways

Bonuses can be an effective way of encouraging productivity from your employees and rewarding them for their efforts. As an employer, you should be aware of the different types of bonuses, as well as whether they will be monetary or in the form of non-cash awards. Furthermore, successfully and lawfully paying bonuses involves a proper understanding of your obligations. These include:

• being transparent and honest with your employees;
• exercising your discretion in good faith; and
• considering any tax implications when paying bonuses and following these rules.

If you need help understanding bonuses in England, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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