Bonus, dividend or profit-share?

Kernow_Pasty

Hi, I have been tasked with implementing a new 'bonus' scheme for a handful of key employees in an SME, some standard and some higher rate tax payers. My only steer is to base it on a set percentage of net profit. Can anyone recommend what form such a scheme should take to be the most tax efficient to both employer and employee? Thanks in advance.

anamenottaken

Kernow_Pasty wrote: »

Hi, I have been tasked with implementing a new 'bonus' scheme for a handful of key employees in an SME, some standard and some higher rate tax payers. My only steer is to base it on a set percentage of net profit. Can anyone recommend what form such a scheme should take to be the most tax efficient to both employer and employee? Thanks in advance.

Both dividends and bonus payments are profit sharing.

Dividends are paid to shareholders. Are the employees also shareholders? If they aren't, did you want to issue shares to them? You'd need agreement of existing shareholders. This could be most tax efficient as I think it avoids NI contributions but you would need to consider very carefully the consequences of issuing shares. If you want to do this rather than simply pay a bonus, get proper professional advice.

theoretica

Have you thought to consult the employees in question? You might find they have opinions and would value one more than the other.

Kernow_Pasty

Thanks, employees have indeed been consulted and unsurprisingly are very positive about ensuring that they get to see as much of the bonus in their bank account as possible! Hence the thrust of the question is around taxation of "bonus schemes".

cazziebo

it would be difficult to find any cash bonus scheme that had some sort of tax efficiency these days. They've all been closed off in HMRC tax avoidance & disguised remuneration measures. The exception is if you have an EBT which qualifies to pay out bonuses tax free, although I believe this scheme can't be used for a select group of employees.

If it is tax efficiency you're looking for, have you considered an EMI (Enterprise Management Incentive) scheme? This can be used to reward individual employees. Share options can be awarded free of tax and NI, and can be exercised free of tax and Ni. CGT is payable on gains, although individuals might be able to claim Entrepreneurs' Relief.

InsideInsurance

My experiences:

Bonus - based on personal performance though the "pot" to be shared amoungst all employees can be linked to things like net profit

Profit Share - tends to be a single percentage paid to all staff with an "acceptable" and above performance thus those that did ok and those that did amazingly both get the same 5% of salary payment. In theory of cause it could be a flat rate rather than percentage.


Where I've worked all have been involved in a percentage based profit share but only managers were eligible for bonuses. Profit share was always maxed at 10% of salary, bonuses depended on grade but middle management maxed at 30%, senior management 50% and non-board directors 100%. Obviously as bonuses are individually assessed these were the maximums payable and most would get less. At my last perm job all managers had unlimited bonuses but the average over the last few years had been 20%

getmore4less

Salary sacrifice into pension.

Zero tax and Ni for both.

Don't forget to take the bonus off the profit to get net.

cazziebo

getmore4less wrote: »

Salary sacrifice into pension.

Zero tax and Ni for both.

Don't forget to take the bonus off the profit to get net.

Not sure employees would see that as a bonus - especially if it's a young workforce. (but it is an effective, sensible reward mechanism)

somethingcorporate

I assume you have an accountant? why not talk to them...?

bap98189

Some sort of dividend is going to be the most tax-efficient option as dividends are not subject to NI. The tax rate payable on them will depend on the individual's circumstances, but will generally also be advantageous over PAYE. The downside is that dividends are not taxed at source, so the recipients will a) need to complete their own tax return and b) be liable for a tax bill at the year end, so need to put aside funds to pay this.

Typically a company will pay these type of bonus dividends by issuing class B (non-voting ) shares to certain employees. These shares can have different capital, voting and dividend rights to the current Class A shares, exact details of which will need to be laid out in the company's articles.

Really you need to talk to your accountants. This is what they are paid for, and they should be able to advise you and set this sort of thing up.

InsideInsurance

bap98189 wrote: »

Typically a company will pay these type of bonus dividends by issuing class B (non-voting ) shares to certain employees. These shares can have different capital, voting and dividend rights to the current Class A shares, exact details of which will need to be laid out in the company's articles.

Really you need to talk to your accountants. This is what they are paid for, and they should be able to advise you and set this sort of thing up.

Presumably however Class B remains the property of staff that leave the company and so the profit share would not just go to current employees that have generated the profit but all former employees too so as time goes on the amount per head will go down assuming profits remain broadly static. Obviously not an issue for today but will be in a couple of years time.

I guess there is no way to make shares automatically forfeit on resignation/ dismissal/ retirement without paying the owner something?