Definition
A supplementary payment made to an employee in addition to their base salary, typically linked to individual performance, company results, or achievement of specific targets. Bonuses may be contractual or discretionary.
UK Context
In the UK, bonuses are subject to PAYE income tax and National Insurance contributions. Whether a bonus is contractual or discretionary affects the employer's obligation to pay it and the employee's ability to claim if it is withheld. Under the Equality Act 2010, bonus schemes must not discriminate on protected characteristics.
Best Practices
- Clearly document whether bonuses are contractual or discretionary in employment contracts
- Set transparent and measurable criteria for bonus eligibility and calculation
- Ensure bonus schemes do not disadvantage employees on family-related leave
Frequently Asked Questions
Is a bonus subject to tax and National Insurance?
Yes, bonuses are taxable earnings and are subject to PAYE income tax and both employee and employer National Insurance contributions. They are typically processed through normal payroll.
Can an employer withhold a discretionary bonus?
If the bonus is genuinely discretionary, the employer is not contractually obliged to pay it. However, they must exercise discretion rationally and not in a way that is perverse, irrational, or discriminatory. Repeated payment of a discretionary bonus may create an implied contractual term.