Staff bonuses – how do they work?

Keeping staff engaged can be difficult, leading many SMEs to issue staff bonuses as a way to incentivise employees to give their best to the job. But what are the implications for you and them?

What are staff bonuses?

Staff bonuses can take a number of forms:

• A sum calculated according to the overall financial performance of the business
• A percentage of a transaction (often used for members of a sales team)
• A cash amount paid as a one-off “thank you” for exceptional work
• Another non-cash “gift”

Whichever way you choose to reward your staff, it is extremely important to remember that HMRC regards bonuses as taxable earnings, and they will need to be declared as such.

It is also important to note that non-cash gifts are also fully taxable, and will need to declared. At the end of the financial year, you will need to submit a P11D form for each employee who has:

• Earned over £8,500 in the previous year.
• Received a bonus or other benefit that has not been taken out of their wages using PAYE.

Where employees earn less than £8,500, you will need to complete a P9D form. HMRC will then adjust the employee’s tax code for the following year to recoup any tax owing on the bonus. You must also ensure that your employees are issued with a copy of the relevant form for their own records. If you are using freelancers or contractors, they will need to attach this form to their self-assessment tax return.