Bonus and incentive schemes

Bonus and incentive schemes

Many employers operate bonus or incentive schemes in addition to paying basic salaries to their employees. Such schemes will normally make it clear whether entitlement is discretionary or contractual.

Discretionary bonuses usually give employees a contractual right to be considered for a bonus or incentive payment under the scheme, but not necessarily to receive one. In the absence of express agreement a bonus entitlement may be implied on the basis of established custom and practice, eg a right to be paid a Christmas bonus may be implied where it has been paid to all employees for a number of previous years (see Frischers v Taylor (unreported EAT 386/79)).

Any bonus entitlement should be included in the employees' written statement of employment particulars. See the Written statement of particulars or terms and conditions and Definition of wages guidance notes.

Bonus schemes are generally intended to ensure that employees focus their efforts on key objectives of their employer's business. The benefit for the employee is that he may receive greater financial reward. The benefit for the employer is that employees are motivated to work harder and not lose their bonus entitlement by leaving employment.

Where a bonus is paid in cash, it is liable to PAYE tax and Class 1 national insurance. Bonuses paid in kind are taxable in accordance with the benefit in kind rules.