Paying bonuses to employees outside of payroll is generally not recommended, and in many cases, it is not legal and should be avoided.
Tax Reporting:
- All payments to employees, including bonuses, must be reported to HMRC. Paying bonuses or commissions outside of payroll can lead to underreporting income, which is illegal and can result in penalties for both the employer and the employee.
Withholding:
- Payroll ensures that the correct amount of tax and national insurance deductions are withheld from employees earnings. Bonuses & commissions outside of payroll might not have these deductions withheld, leading to tax compliance issues.
Accurate records:
- Payroll ensures accurate record- keeping for both the employer and employee. It tracks all earnings, deductions and contributions which is crucial for HMRC filing compliance.
Transparency:
- Employees may not fully understand their tax obligations if bonuses & commissions are paid outside of payroll, which can lead to misunderstandings or dissatisfaction.
Benefits Impact:
- Payments made outside of payroll often affect other employee benefits, pensions, insurance and unemployment insurance.
Penalties & Fines:
- If payments are made outside of payroll and not reported correctly, the business could face significant penalties and fines from HMRC.
To stay compliant and avoid legal & financial risks, ensure you pay all employee bonuses & commissions through your payroll system. If you want to give your employees something extra, such as a gift or non-cash benefits, consult with us first to ensure best practice.
Read our guide on Staff Entertainment Allowance or Employment Allowance For Employers for some more insight.
If you need assistance understanding your finances, get in touch with our expert accountants today!