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Accounting for allowances and benefits for staff: Bonuses

Taxing regular bonuses

Definition

A regular bonus is any bonus paid frequently throughout the year, such as:

  • monetary incentives
  • production bonuses
  • overtime.

How to tax a regular bonus

  • Add the bonus amount to the employee's gross wages for the pay periods in which they were earned.
  • Deduct PAYE from the total, based on the employee's normal tax code. Use our PAYE calculator at  Work it out >.

Tax calculations for more than one pay period

Monthly bonuses covering more that one pay period
  1. Add up the gross wages paid in the month, eg if you pay weekly, add the four weekly payments together.
  2. Work out the PAYE on the gross wages for the month by:
    1. using our PAYE calculator, and
    2. selecting monthly when asked "how often is employee paid?" 
  3. Add the bonus to the gross wages calculated at step 1 and work out the PAYE for the month on the total.
  4. Subtract the PAYE calculated at step 2 from that calculated at step 3.  This gives you the PAYE on the bonus.
Bonuses covering more than one month
  1. Divide the bonus by the number of months it covers.  This gives you the monthly bonus amount.
  2. Add the monthly bonus to the normal pay for the month and calculate PAYE. Select monthly in the PAYE calculator.
  3. Calculate the PAYE on the normal monthly pay and subtract this amount from the PAYE calculated at step 2 above.  This gives you the PAYE on the monthly bonus.
  4. Multiply this by the number of months the bonus covers to get the total PAYE to be deducted from the bonus.
Note  
For the two situations above, include the PAYE on the bonus with the PAYE on the wages for the period in which the bonus was actually paid.
Bonuses for a broken period

If a bonus covers a broken period, such as when an employee leaves, treat the bonus as being for the whole of the pay period.  Add the bonus to wages in that pay period.

 

 


Date published: 16 Jan 2007

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