Changes to Bonus Rules

A recent change in accounting rules altering the way HM Revenue and Customs (HMRC) looks at bonuses given to company directors is set to affect many smaller companies.

 

In the past it was usual to decide bonus levels based on draft year end accounts, which are normally available some weeks after the end of the financial year. Then, once the level of profit was known, the bonus would be decided and the appropriate accrual put in the accounts. Corporation Tax relief would then be obtained on the profits for which the bonuses were voted, provided the bonus was paid within nine months of the year end - this rule remains in place.

 

However, following this change a bonus can only be accrued if the company is obliged to pay it at the year end. You do not have to know the precise sum, but for it to be claimable against that year's profits you must declare the bonus before the year end.

 

A director receiving a bonus will become liable for PAYE when:

 

 

As a result, in a typical situation where the setting of the bonus level is the first of these (for example at 10% of pre-tax profits) there is no PAYE liability until the figure involved is known. For a discussion of your company's bonus policy, please ask to speak to one of our commercial lawyers.

 

Call Tony Forster on 0117 9290451 or email tforster@metcalfes.co.uk

 



This press release summarises the law on issues which we believe may be of interest to your business. It is not a comprehensive review of the subjects and accordingly is published without responsibility for loss occasioned to any person(s) acting or refraining from action as a result of information published