The start of 2020 saw press coverage relating to organisations which had seen their good intentions thwarted when they had paid cash bonuses to employees only to see that those employees lost a corresponding amount of their benefits provided through Universal Credit.
In practice, paying bonuses often has a negative effect, because employees are left short of money in subsequent periods and the bonus payments cause real hardship. However, there is one limited situation in which bonuses can be paid without affecting Universal Credit payments. This is through employee ownership.
Qualifying bonus payments made by companies controlled by an employee ownership trust (EOT) or a deemed EOT are exempt from income tax. Qualifying bonus payments are, therefore, not treated as earnings for the purpose of Universal Credit and will not affect the entitlement to benefits.
It is important that the Real Time Information (RTI) provided to HM Revenue and Customs correctly shows EOT bonuses as non-taxable earnings, as the Department of Work and Pensions (DWP) uses this information for the purposes of calculating a claimant’s earnings. However, on that basis, the DWP has confirmed that qualifying bonuses should not affect Universal Credit. This, in addition to the ability to pay £3,600 free of income tax (but subject to national insurance contributions), means that the ability to pay qualifying bonuses is a significant advantage for employee-owned businesses.
It is always important to check that the statutory criteria for making qualifying bonus payments are met on each occasion before bonus payments are agreed or made. A written plan should be drawn up and a checklist included to confirm that the criteria are met and that bonuses qualify.
Tamsin Nicholds is a senior associate and tax lawyer at Fieldfisher.