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.