Can I Pay Bonuses Through Payroll or Separately

Introduction

Bonuses are a common way to recognise employee performance, loyalty, or business success. However, because they count as earnings, they are subject to the same tax and National Insurance (NI) rules as normal pay.

Whether you issue a Christmas bonus, an annual performance payment, or a one-off reward, it is important to process it correctly to avoid tax errors and compliance issues.

Are bonuses classed as earnings

Yes. HMRC considers most bonuses to be part of an employee’s pay. This means they are subject to:

Income Tax.

Employee National Insurance contributions.

Employer National Insurance contributions.

Pension contributions, if applicable under your scheme.

Bonuses are treated as “taxable income” regardless of whether they are paid in cash, vouchers, or other benefits with monetary value.

Because of this, all bonuses paid to employees must be reported to HMRC through payroll using the PAYE (Pay As You Earn) system.

Paying bonuses through payroll

The simplest and most compliant way to pay bonuses is to process them through payroll at the same time as normal wages. This ensures that:

PAYE tax and NI are calculated automatically.

Deductions are reported in real time under HMRC’s Real Time Information (RTI) system.

The payment appears on the employee’s payslip for transparency.

You can include bonuses in a regular monthly payroll run or as a separate payroll submission, such as a one-off bonus run, as long as the same PAYE procedures are followed.

When entered into payroll software, the system will automatically calculate tax and NI based on the employee’s cumulative pay to date.

Paying bonuses separately

You can issue a bonus separately from regular wages, but it still needs to be processed through payroll. For example, if you want to pay a special performance bonus mid-month, you can create a standalone payroll run just for that payment.

This ensures HMRC is notified and the correct deductions are applied. Simply making a bank transfer without reporting it through payroll would be non-compliant and could result in penalties or backdated tax.

Even if the bonus is paid via cheque or cash, it must still be recorded as income and included in PAYE submissions.

When bonuses are not taxed

Most employee bonuses are taxable, but there are limited exceptions. Small, occasional non-cash gifts, such as a modest bottle of wine or flowers given as a gesture of appreciation, may qualify as a trivial benefit if they meet HMRC’s criteria:

Cost less than £50.

Not given in recognition of work or performance.

Not part of an employee’s contract.

Not cash or a cash voucher.

Anything that fails these conditions should go through payroll as a taxable bonus.

National Insurance on bonuses

Both employers and employees must pay National Insurance on cash bonuses. The rate and calculation depend on each employee’s earnings in that pay period.

If a bonus pushes an employee into a higher tax or NI bracket temporarily, the system will apply the correct higher rate for that period. HMRC’s cumulative calculation method ensures that tax balances out over the year.

Employers must also include bonuses when calculating pension contributions if they are classed as pensionable pay under the scheme’s rules.

Timing and frequency of bonus payments

Bonuses can be paid at any time during the year. Common types include:

Annual performance bonuses linked to company results or personal targets.

Seasonal bonuses, such as Christmas payments.

One-off rewards for exceptional work.

Referral bonuses for recommending new employees or clients.

The key is that all such payments must be included in payroll reporting for the pay period in which they are made.

Accounting and reporting

Bonuses are recorded as part of your payroll expenses. They should appear on employees’ payslips and be reported on your Full Payment Submission (FPS) to HMRC.

Employers must also:

Include bonuses in P60 year-end summaries.

Record them in company accounts as staff costs.

Reflect them in tax and pension calculations.

For directors or senior managers, bonuses must also be authorised properly under company rules or trustee approval if you run a charity or not-for-profit organisation.

Gross or net bonus payments

When offering a bonus, you can choose whether to advertise it as:

Gross: The total amount before tax and NI deductions.

Net: The amount the employee will receive after deductions.

If you promise a net bonus, you must calculate and cover the tax and NI yourself, which increases the overall cost. Always make it clear in advance which approach applies.

Bonuses for non-employees

If you want to reward volunteers, contractors, or consultants, the process is different.

Volunteers: Monetary bonuses may create a legal employment relationship. Stick to small, non-cash gifts or reimbursements.

Contractors: Bonuses can be added to their invoices and are subject to self-assessment tax rather than PAYE.

Consultants: Payments must be in line with the contract and may fall under off-payroll working (IR35) rules if they operate through a limited company.

Seek professional advice before paying bonuses to non-employees to avoid unintended tax or employment implications.

Common mistakes to avoid

Paying bonuses outside of payroll and failing to report them to HMRC.

Forgetting to deduct or pay employer National Insurance.

Misclassifying a cash gift as a trivial benefit.

Promising “net” bonuses without calculating the extra employer cost.

Not keeping clear records of authorisation and payment dates.

Avoiding these mistakes helps ensure compliance and prevents costly payroll corrections later.

Conclusion

Bonuses must always be processed through payroll, even if paid separately from normal wages. Doing so ensures that tax, National Insurance, and pension contributions are calculated correctly and that HMRC receives accurate real-time information.

Paying bonuses fairly and transparently builds trust with employees and protects your organisation from compliance risks. Whether it is a one-off thank-you payment or part of an annual incentive plan, managing bonuses through proper payroll channels is always the right approach.