Bonus deferral could have tax implications

Employers considering offering the deferral of bonuses may need to seek written agreement from employees.

A number of organisations, including Aon, Tullett Prebon and Virgin Media, are offering employees the opportunity to defer bonuses until after 6 April 2013 to allow them to take advantage of the change to top-rate tax, which will fall from 50% to 45% on this date.

Martin Griffiths, associate at Charles Russell, said that the tax point of a bonus is, in general, when the employee becomes entitled to the payment. Therefore, if an employee is contractually entitled to the bonus, in order to benefit from the changes in the new tax year, they may have to provide the employer with express written agreement to defer the entitlement.

He added that, for directors’ bonus payments, if the amount they will receive is determined before the end of the tax year, this could bring the tax point forward to the current tax period. Therefore,employers should try not to determine how much each individual will receive as a bonus until the next tax year to allow them to benefit from the changes. Griffiths said this could prove difficult if the determination is tied to an organisation’s announcement of annual results.

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He added: “Each individual case should always be considered on its facts. If an individual’s marginal rate of tax ends up being lower in the tax year 2013/14, a bonus deferral may end up costing the individual more in tax.

“It should not always be assumed that bonus deferral will necessarily be beneficial and affected individuals should be consulted.”