Bonus Deferral – Bankers Lead the Way!
The Government is coming under increasing pressure to act as many banks and other financial institutions are considering deferring bonus payments until after 5 April 2013 in order to take advantage of the reduction in the top rate of income tax from 50% to 45%.
It has recently emerged that Goldman Sachs and a number of other banking and City Institutions is considering pushing back the pay dates of various deferred bonus awards for its staff.
However, this should come as no surprise. When the 50p top rate was announced, a whole range of companies (including banks and supermarkets) decided to award bonuses earlier than usual to beat the increase.
This is simply basic, standard and good tax planning. Nothing unethical about this at all – why pay more tax when there is no reason to do so!
Nonetheless, when deciding to defer bonuses, there are a number of tax and employment law issues that must be considered, including the wider reputational issues for those companies in the public spotlight.
Is Consent Needed for a Bonus Deferral?
Where bonus payments are discretionary in nature (as most awards are), it is possible to defer the internal decision-making process and, therefore, not require prior formal consent from the employees concerned.
However, where the bonus payments are contractual, for example, pursuant to an employment contract or, more likely, as set out in a separate stock option / bonus agreement between the employer and employee, it will be necessary for an employer to seek the prior consent of the employee to any proposed bonus deferral. In practice, this should not be too difficult to achieve, but getting this step wrong could seriously jeopardise the expected tax treatment and so companies (and their advisers) should proceed with caution.
When is a Bonus Taxable?
For tax law purposes, a bonus is generally taxable and subject to income tax and national insurance contributions (NICs) when the payment of the bonus is treated as made.
This is generally the earliest of: (i) the time the payment is actually made and (ii) the time the employee becomes entitled to the payment. (There are slightly different timing rules for directors.) It should be noted that this is distinct from the time when entitlement to the bonus arises, for example, when pre-determined performance targets or some other agreed measures or results are met.
How to Defer Bonus Payments Effectively for Tax Purposes
In order to make a deferral of a bonus payment effective for income tax and NIC purposes, it is essential to defer not only the actual payment of the bonus but also the time at which the employee becomes entitled to its payment.
It would not be sufficient to achieve a bonus deferral (for income tax and NIC purposes) if either:
(i) an employee is entitled to a bonus payment on a particular date in the 2012/13 tax year and the bonus payment is simply deferred until the 2013/14 tax year; or
(ii) an employee is entitled to a bonus payment on a particular date in the 2012/13 tax year and the employer and employee agree on or after such date that the bonus payment need not be made until the 2013/14 tax year.
However, a bonus deferral should be successful in deferring the associated income tax and NIC liability if either:
(i) an employee is entitled to a bonus payment on a particular date in the 2012/13 tax year and a deferral of such payment to the 2013/14 tax year is properly agreed between employee and employer prior to that date; or
(ii) where the bonus payment date is discretionary and the employer determines (and, where necessary consults with employees) prior to any habitual payment date that the bonus will be paid on or after 6 April 2013.
The Disguised Remuneration Rules
When any planning surrounding employment payments is being considered, it is generally recommended to check the impact of the anti-avoidance provisions contained within the disguised remuneration rules.
Such provisions can operate to give rise to an income tax charge and NICs liability which is earlier than the time when the employee becomes entitled to the bonus payment. This can occur when, for example, a sum of money is earmarked for an employee, but with a later payment date. In such cases, these rules can apply so that tax and NICs apply at the time at which the sum is earmarked for the employee, even if the recipient is not yet entitled to receive payment of that bonus.
Conclusion
Overall, deferring bonus payments in order to minimise the income tax and NICs liability is nothing new and can be highly effective and beneficial).
However, there are a range of issues that should be considered prior to committing to any proposed bonus deferral and, therefore, it is highly recommended that expert tax and employment advice is sought at the outset.
Newshams Tax Solicitors in London has excellent expertise in this area. If you are considering a bonus deferral (or any other form of employment remuneration and/or incentive) and want to ensure the tax costs are fully mitigated, contact our tax lawyers in London today by calling 020 7470 8820 or e-mailing us on enquiries@newshams.com
In August of 2012, HM Revenues and Customs (HMRC) sent penalty notices to about 500,000 individuals due to missed self-assessed tax return submissions. According to a report from the BBC, each of these individuals were notified about their penalties amounting to no less than £1,200. This annual case of missed tax deadlines may be a sign that members of the private sector have a growing need for professional tax advice in London.