If you pay your employees bonuses based on your company’s performance for the year, the cost of those bonuses can be included in your company accounts even if they have not been paid at the year-end.
This will have the effect of reducing the company’s profits and its tax liability. For this to happen, a few conditions must apply.
- At the financial year end there must be a “present legal or constructive obligation” to pay the bonuses.
- A reliable estimate of the amount payable must be possible.
- They must be physically paid within nine months of the end of the financial year to which they relate. There will be no PAYE or NI to pay in respect of the bonuses until after they have been paid (just as with wages and salaries).
For example, £10,000 of bonuses has been promised to staff for their excellent performance during your company year which ended on 31 December 2023. The bonuses are paid in September 2024 (within nine months). The PAYE/NI will be due in October 2024. The corporation tax (19% – 25%) for the year ended 31/12/2023 will be £1,900 – £2,500 lower than it would have been had the bonuses not been accrued.
Unfortunately, directors’ bonuses can’t be accrued in this way.
Be sure to tell EBA when we prepare your company’s accounts if there are any bonuses to accrue.
