After reducing your salary because of poor cash flow over the summer months the plan is to top up your pay with a bonus. It won’t be paid until after the end of the company’s current financial year, but when must you account for the PAYE?

Directors’ pay

The question of when a company is required to account for PAYE on directors’ remuneration crops up time and again, and time and again we’ve seen misleading answers. The correct position is made quite clear by the special rules which apply to directors’ remuneration. The rules are there to prevent companies obtaining a corporation tax (CT) deduction while avoiding or deferring the corresponding PAYE tax.

Paid and received

PAYE legislation says that tax is triggered when a director is “paid” and that a director’s remuneration counts as paid when they receive it. The main tax legislation says that a director is treated as receiving remuneration on the earliest of:

  • Lthe date when earnings are credited in the company’s accounts or records; or
  • (if the amount of the earnings is decided before the end of the company’s accounting period to which they relate) the date that period ends; but
  • (if the amount of the earnings is decided after the end of the period to which they relate) the date the amount is determined.

The following examples should resolve any questions you may have about when to account for PAYE on directors’ pay.

Example – credited in the company’s records. Acom Ltd’s financial year ends on 31 December. Without a formal resolution to decide on the directors’ remuneration Acom pays each of them £8,000 per month. This is recorded in the company’s accounting records on the last working day of each month. Consequently the remuneration is treated as paid and received on that day.

Example – decided during the financial period. In a board meeting on 31 October 2020 the directors of Acom make a resolution to pay themselves a bonus for the year ended 31 December 2020 to be payrolled on 31 January 2021. The bookkeeper therefore doesn’t record the bonuses in Acom’s books until 28 January 2021. The date on which the bonus was decided was during the financial period to which it relates. It therefore counts as paid and received on 31 December 2020. A PAYE report should be sent to HMRC that day. Tip. It’s a common misunderstanding that in the circumstances described in the second example, the date of payment and receipt of the bonus would be 31 October, i.e. the date the directors’ resolution is made. That’s not correct even according to HMRC (see The next step ).

Example – decided after the financial period. The facts are the same as the previous example except that the directors don’t make the resolution confirming the bonus until they see the draft accounts for the financial period. They see these on 12 April 2021 and decide on the bonus for that accounting period on 20 April. The bonus counts as paid and received on the 20th. A PAYE report should be sent to HMRC that day.

Tip. Even though the bonus was paid after the end of the accounting period, as long as the liability to pay it was accrued before that time, Acom can claim a CT deduction for it in its accounts to 31 December 2020.

PAYE is triggered on the earlier of the date the bonus is recorded in the company’s financial records, the end of the accounting period to which the bonus relates and the date when the directors determine the amount of the bonus. By itself, a board resolution to pay a bonus doesn’t count as payment and so does not trigger PAYE.

The next step

Employment income: basis of assessment for general earnings
Employment income: basis of assessment for general earnings: meaning of “received”

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.