• This topic has 39 replies, 29 voices, and was last updated 9 months ago by Sui.
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  • Tax efficiency: bonus.
  • Premier Icon noone
    Full Member

    Not sure if I’m going to regret this but I thought that somewhere within the calls to “pay my fair share”, I might get a little nugget of advice.

    I have been offered the ‘opportunity’ to have my bonus paid over a number of months (up to 10) under the guise of it being more tax efficient. So far as I understand income tax, it is just a % of what I earn and if I end up paying more tax in the month I get my bonus, then it is just dribbled back to me over the remainder of the year.

    Accordingly, my tax liability at the end of the year should be the same whether my bonus is paid in one chunk or whether it is split into 10 payments over 10 months.

    A little bit of me is thinking that this is just to spread out bonus payment liability for my employer but it wouldn’t be the first time that I’ve been overly cynical.

    Premier Icon Sui
    Free Member

    i see no way this could work unless you are planning earinging less in the next qualifying period. To me it sounds as though its a cash flow issue they don’t want you to know about and/or is worth more to them as an end of year tax saving..

    Premier Icon woody2000
    Full Member

    I think you could pay more in NI, but the tax would be the same regardless of lump sum or monthly instalments.  Depends how much the bonus is I guess

    Premier Icon DT78
    Free Member

    depends, is it going over the FY end? In which case you may get to apportion some to next FY’s tax allowance – and depending on your total income this may make a difference due to bandings.

    Premier Icon squealer
    Free Member

    Yeah woodys right, you’ll pay more ni spreading the bonus out. Tax will be the same.

    Premier Icon noone
    Full Member

    To clarify, becomes payable 2 months into FY for the previous FY. Up to 10 months takes us to immediately prior to the next FY. so entire bonus paid within one FY whether it is paid in one lump sum or installments.

    Premier Icon DT78
    Free Member

    ok. I would politely decline and ask for it as a lump sum.

    and maybe get friendly with someone in finance who could let you know how the company is looking…

    Premier Icon scotroutes
    Full Member

    Someone is trying it on – unless they’re suggesting you might not have a job after a few months…

    Premier Icon footflaps
    Full Member

    and maybe get friendly with someone in finance who could let you know how the company is looking…

    Having cash flow issues by the sounds of it 😉

    Premier Icon Alphabet
    Full Member

    What would happen if you left before the entire bonus was paid out over monthly installments? Would they pay you the remainder? Likewise if they made you redundant or sacked you or the company went under?

    I’d take the bonus in one lump sum.

    Premier Icon orangespyderman
    Full Member

    under the guise of it being more tax efficient

    I would politely ask whoever is saying that to explain how that would work for you, because you’re not clear why it would be beneficial. Then sit back and listen to them try. And then ask for a lump sum. 🙂

    Premier Icon BoardinBob
    Full Member

    It’ll ultimately make no difference tax wise whether it’s paid in one lump sum or over the year, assuming it doesn’t straddle a tax year end.

    What i think they’re getting confused with is what happens to your PAYE in the month the bonus is paid in if your not a higher rate tax payer. In the past I’ve had bonuses when I wasn’t a higher rate tax payer and despite the bonus not taking me over the higher rate threshold for the year, i was taxed in bonus month as though I would be paid that amount every month for a year. That usually gets corrected over following months, or most likely via one big tax rebate after the end of the tax year.

    but ultimately you wont end up in a better or worse position as long as the longer term bonus payments don’t straddle two tax years and having it paid in one lump sum would move you into the higher rate band.

    Premier Icon Kryton57
    Full Member

    The only way not helps you is if some of its paid after April and is in the new tax year, therefore keeping (potential) under a Tax threshold for each year – this and next.

    Premier Icon woody2000
    Full Member

    If the bonus would push you over the monthly UEL for NI then you will definitely be better off with a lump sum as you’ll only pay 2% NI on the amount over the limit.  If you get it in bits you’ll pay full whack NI if it keeps you under the upper limit each month.  It won’t be loads, but you’ll definitely have more cash in your pocket!

    Assuming my maths is right of course 🙂

    Premier Icon PaulGillespie
    Free Member

    Doesn’t mean the company is having cash flow “issues”. Finance people don’t like big sum of money leaving the account at once, they prefer spreading it out if possible.

    Premier Icon scuttler
    Full Member

    Bird in the hand etc etc.

    Premier Icon jam bo
    Full Member

    Finance people don’t like big sum of money leaving the account

    fixed that for you..

    Premier Icon Sui
    Free Member

    PaulGillespie

    Member
    Doesn’t mean the company is having cash flow “issues”. Finance people don’t like big sum of money leaving the account at once, they prefer spreading it out if possible.

    only when they need their accounts to show flush or they have impending commitments that trump yours -are you private equity and due a loan note payment, or up for sale at all – i’ve seen all manner of creative accounting done in PE ownership

    jam bo

    Subscriber
    Finance people don’t like big sum of money leaving the account

    fixed that for you..

    and that!! 🙂

    Premier Icon FB-ATB
    Full Member

    Finance people don’t like big sum of money leaving the account
    fixed that for you..

    Is closer to the truth!

    Premier Icon spekkie
    Free Member

    I thought this was going to be like the “Taxman stole my Xmas Bonus” thread from years ago…..

    Premier Icon Tallpaul
    Full Member

    Does the bonus push your earning in to a higher tax bracket? If so, the only advantage I could see is allowing you to do something like increase your company pension contributions to keep you below the threshold. Otherwise, as above, one lump sum FTW.

    Premier Icon Crag
    Free Member

    If it’s all going to be paid in the same tax year then there is no difference in the tax or NI liability be it paid in one lump or spread over 10 months – NI is dealt with in the same way as income tax – the overall position will be same by year end.

    So far as I understand income tax, it is just a % of what I earn and if I end up paying more tax in the month I get my bonus, then it is just dribbled back to me over the remainder of the year.

    Pretty much this.

    Take the lump sum

    Edit: on further reading seems NI isn’t based on cumulative earnings like tax. Another reason to take the lump.

    Premier Icon woody2000
    Full Member

    NI is dealt with in the same way as income tax

    No, it isn’t.  PAYE is cumulative, NI is per payment and changes (potentially) each time you are paid.

    Premier Icon robowns
    Free Member

    Lump sum – forgetting the possibility of you never seeing it, your also losing out to inflation/on interest.

    Premier Icon Crag
    Free Member

    NI is dealt with in the same way as income tax
    No, it isn’t. PAYE is cumulative, NI is per payment and changes (potentially) each time you are paid.

    Read my post fully.

    Premier Icon woody2000
    Full Member

    I posted as you were ninja editing 😉

    Premier Icon shinton
    Free Member

    It’s not clear when the monthly/yearly bonus payments will be paid

    For example, if I start a new job on Jan 1st 2020 and get offered my bonus paid every month during March-December 2020 or as a one off payment in December 2020 I would go for monthly bonus payments.

    I’m on a 20% bonus plan depending on sales and get paid over 10 months as above.

    Premier Icon thisisnotaspoon
    Full Member

    I would get it as a lump sum for the reasons others said. Unless there’s something unique about your circumstances (tax credits, CSA, expecting to take a pay cut next year).

    I got annoyed with my last job as they would pay my overtime ad-hock when clients had paid their bills for that project.

    So if a project was 4 months long (and not lining up with payday months) I’d typically end up getting at a minimum 5, sometimes 6 or 7 paychecks with an above the base amount in them, often these would be 2-3x the base amount, but not that often would they hit the NI ceiling. So I was paying way more NI than I would if either they payed an agreed number of months in arrears, or just averaged it out over the whole year as a proper salary.

    Premier Icon swdan
    Free Member

    As said above, what happens if you want to leave in 3 months time? Will they still pay it all to you?

    Premier Icon nickdavies
    Full Member

    This can cause complications, HMRC can alter your tax position based upon a bonus payment, as their systems wont differentiate between a bonus and pay rise. Essentially they can view the bonus as a pay rise, alter your tax code if you hit the next bracket for example, then over tax you going forwards. If youre aware of it you can sort it yourself and avoid the issue but it does cause problems. Yes it sorts itself out, but better to not have to try and reclaim it. And yes, ive had first hand experience of this and it took a while to sort. I think bonuses now get deferred though, as they expect christmas bonuses so they avoid recalculating until April.

    Plus, not to mention the fact that some people just cant budget – personally as an employer id offer a split payment option just because for some people an extra £500 a month could make quite a big difference, but £5k would just get spunked up the wall! Horses for courses though, your employer might just be being tight! 😂

    Premier Icon dc2.0
    Full Member

    Left field suggestion: get them to pay it into your pension for you (salary sacrifice) along with a share of the employer’s NI they’ll be saving).

    Matters not then about employee NI, but of course means the money is out of reach for a bit.

    Premier Icon batfink
    Full Member

    Yeah, pretty clear that this is to recover a chunk of the bonus from people who leave over the next year. Even with 5% turnover they will be clawing back a pretty penny.

    Why on earth would anyone agree to this?

    Premier Icon theotherjonv
    Full Member

    Why on earth would anyone agree to this?

    Well – how about because if everyone demands their contractual bonus at once it’ll f’up the company’s cash situation and they’ll have to make redundancies / go under instead? If you were told that would you agree to a delay / staged payment?

    But I agree, if that’s the case they should address it properly and not try and stealth it.

    Premier Icon noone
    Full Member

    Thanks all.

    To add a little clarity; the offer has come about because someone I have just taken on has specifically asked for any bonus to be spread over X months and cited tax/student loan benefits. I passed this on to higher-ups; they’re not bothered and have offered it to me also; if I want it.

    I haven’t entertained it long enough to negotiate the circumstances in which the balance would become payable.

    I’ve sight of the important stuff and no cash flow issues are obvious etc…

    Premier Icon FunkyDunc
    Free Member

    Ask them to explain how it is more tax efficient.

    Personally I can’t see how it would be.

    Premier Icon nealglover
    Full Member

    Your colleague with the student loan who asked for it to be spread out has probably read this

    https://www.moneysavingexpert.com/team-blog/2018/12/student-loan-borrower–why-working-extra-shifts-or-getting-a-bon/

    Premier Icon wrightyson
    Free Member

    For a true “It happens to me” perspective. I get my bonus in September now purely to run with the company account dates. The taxman absolutely dry bums me bit I have it as a lump sum. The next 3 months or so pay are slightly higher than normal due to the taxman realising he’s a bastard and letting me have a bit of it back. Live now, take the lot, it will make no difference.

    Premier Icon nealglover
    Full Member

    Can’t get direct link to work above.

    https://lmgtfy.com/?q=student+loan+working+extra+can+cost+you+money

    Premier Icon thisisnotaspoon
    Full Member

    Ahh yep, student loan makes sense as it’s x% over £yk (depending on when you graduated) so if you’re hovering around the threshold but not going to trouble the NI ceiling you’d pay less spreading it out.

    Well – how about because if everyone demands their contractual bonus at once it’ll f’up the company’s cash situation and they’ll have to make redundancies / go under instead? If you were told that would you agree to a delay / staged payment?

    If a company I worked for was in such a bad way it couldn’t pay the wages I’d be taking the money and polishing my CV!

    Think about it the other way, the bonus is because you’ve been making them more money than your salary says your worth for the past 12 months, it’s already in arrears, not advance.

    Premier Icon Sui
    Free Member

    Well – how about because if everyone demands their contractual bonus at once it’ll f’up the company’s cash situation and they’ll have to make redundancies / go under instead? If you were told that would you agree to a delay / staged payment?

    If a company I worked for was in such a bad way it couldn’t pay the wages I’d be taking the money and polishing my CV!

    Think about it the other way, the bonus is because you’ve been making them more money than your salary says your worth for the past 12 months, it’s already in arrears, not advance.

    just to add weight to this. A company will be accruing bonus payments over the course of the year. Most bonus’ are discretionary when you lok at contracts, so if the business has not performed they will just plow that accrual back into cash.

    That said in the case of the OP, with the context given it just seems as though finance have just regurgitated what is a valid reason for a student..

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