Fiscal Event: Income tax changes – implications for employers

NB: This article was published before the Chancellor announced on 3 October 2022 that the Government is now not proceeding with the abolition of the 45p tax rate.

The Chancellor has announced that, with effect from 6 April 2023, the basic rate of income tax set by the UK Parliament will reduce to 19 percent and the 45 percent additional rate will be abolished (these changes will not apply to Scottish taxpayers’ employment income, and though abolition of the additional rate will affect Welsh taxpayers, the proposed Welsh basic and higher rates of income tax for 2023/24 have not yet been announced by the Welsh Government). These announcements could result in some employees who are subject to tax in either tax band asking employers to defer bonuses (or other salary payments) that would otherwise be made during 2022/23, in the expectation of being taxed at lower rates in 2023/24. However, bonus deferrals are not necessarily straightforward. They can give rise to complex tax, governance and reputational considerations. This article summarises some of the points that employers should consider when determining whether a bonus deferral would be possible and appropriate.

Whether it’s appropriate to allow employees to defer bonuses to a time when income tax rates will be lower than at present is a less straightforward question than it might appear.

In addition to the key question of whether a bonus could be restructured to defer the date on which income tax arises, paying both deferred and current year bonuses in 2023/24 could have wider tax, and broader governance, implications. There are also important reputational considerations.

What are the income tax issues with deferring a bonus?

Paying a bonus later than originally planned (e.g., making payment on, say, 30 April 2023 when the bonus was originally to be paid on 30 March 2023) may not of itself defer the date on which income tax charges, and PAYE obligations, arise. Also, purporting to allow employees to choose when a bonus is received may not be effective.

Instead, for deferral to be effective for income tax and PAYE purposes, the bonus arrangements must be amended, and the alteration properly documented, to provide for a later ‘tax point’ (i.e., the date on which the relevant bonus is treated as received for income tax purposes). A bonus cannot be effectively deferred for income tax and PAYE purposes after the original tax point has passed. Deferring the tax point for directors can be particularly complex. Different rules apply for National Iinsurance Contributions (NIC), which are generally only due when an actual payment is made.

Are there any other tax issues?

Paying both a deferred and current year bonus in 2023/24 could give rise to other tax issues. These include potential restrictions on tax relief for pension contributions, and the potential claw back of employees’ entitlements to certain state benefits and tax credits. These issues must be carefully managed.

What about the broader considerations?

Broader governance and reporting points can also arise. For example, employers should consider fairness and equality within their organisations – what might be the HR impact of offering bonus deferral to one group of employees but not another, and how might offering bonus deferrals be perceived by employees who may not benefit to as great a degree as higher earners?

Employers also need to think about how any changes will be communicated, agreed and documented. What are the options if employees do not want to defer their bonus as proposed? Additionally, paying both deferred and current year bonuses in 2023/24 might have a potentially distorting effect on pay gap reporting. If so, could this be explained and justified in a way that would be acceptable to the employer’s stakeholders?

More generally, how might it be perceived by the employer’s wider stakeholder base and, potentially, be subject to public comment? The accounting impact of any bonus deferrals should also to be confirmed before any final decisions are made.

What should employers do?

For some employers, whether to allow employees to defer bonuses in expectation of the prospective income tax rate reductions may be a complex question, and could require modelling of the potential impact on specific employee groups, the accounting position, and pay gap reporting.

Employers should identify the considerations relevant to the circumstances, and consider each of these fully, before making a final decision.