Avoid a PAYE trap for end of year bonuses

Different rules

The timing of PAYE tax and NI liabilities for bonuses paid often causes confusion. One reason for this is that different rules apply to directors compared with employees. For employees the position is straightforward. PAYE applies when their earnings are “received” by them; they are treated as received at the point the employer commits to transferring the money to the employee. The position can be different for directors.

Anti-avoidance for directors

The basic rules for directors are the same as those for employees but are subject to anti-avoidance rules to prevent companies from obtaining a tax deduction for directors’ earnings where payment is delayed. The rules say that a director is treated as receiving remuneration, e.g. salary or a bonus, on the earliest of:

1. The date when earnings are credited in the company’s accounts or records.
2. Or if the amount of the earnings is decided before the end of the company’s accounting period to which they relate, the date that period ends.
3. But if the amount of the earnings is decided after the end of the period to which they relate, the date the amount is determined.

The following examples illustrate the rules in practice.

Example. Acom Ltd’s financial year ends on 30 April. No company or board resolution is made about timing. Acom pays each director a salary of £10,000 per month. This is recorded in the company’s accounting records on the last working day of each month. Consequently the remuneration is treated as paid and received on that day and that’s when PAYE tax and NI must be applied (Rule 1).

Example. At a board meeting on 31 March 2023 the directors of Acom make a resolution to pay themselves a bonus for the year ended 30 April 2023 that will be entered in the payroll on 30 June 2023. The bookkeeper doesn’t record the bonuses in Acom’s books until 28 June 2023. The date on which the bonus was agreed was during the financial period to which it relates (year ended 30 April 2023). It counts as paid and received on 30 April 2023. A PAYE report should be sent to HMRC that day (Rule 2).

It’s often suggested that in the circumstances described in the second example, the date of payment and receipt of the bonus would be 31 March, i.e. the date the directors’ resolution is made. HMRC’s guidance confirms that’s not correct.

Example. The position is the same as the previous example but the directors delay confirming the amount of bonus (by resolution) until they’ve seen the draft accounts for the year to 30 April 2023. That occurs on 23 June 2023. The bonus counts as paid and received on 23 June. A PAYE report should be sent to HMRC that day (Rule 3).

While the bonus was paid after the end of the accounting period to which it related (year ended 30 April 2023), because the obligation to pay it occurred during that period, Acom is entitled to a corresponding tax deduction in its accounts to 30 April 2023.