Two out of every three companies in Ireland offer a performance bonus scheme
Bonus schemes, either company-based or individual-based, play a key role in aligning employee remuneration to financial performance, and is a key part of any employee’s compensation.
By having a bonus scheme in place, it not only helps attract potential candidates, but it also serves as an effective employee engagement and retention tool. Bonus schemes can also mitigate against wage inflation, especially when 74% of Irish employees expect a salary increase in 2018 according to Aperture Partner’s Employee Engagement Report 2018.
The only bummer about bonuses is how much tax is paid on them! With the marginal rate of tax in Ireland still hovering around 50% for “higher earners”, and employers paying 10.85% employer PRSI on all bonuses, the net effect of performance-related bonuses becomes significantly diluted.
However, more and more companies are looking to use the Small Benefit Scheme to pay some or all of their employee bonuses tax-free.
This has come about because in 2015, the Small Benefit Scheme limit was increased to €500 from €250. This can result in a saving of €244 for every employee’s tax deduction AND a saving of €54.25 per employee for the company in Employer PRSI.
This example highlights the potential saving between the Small Benefit Scheme and Payroll for a €1000 bonus:
Unless your company is already making use of the Small Benefit Scheme, it’s crazy to pay bonuses in Ireland without availing of the €500 tax-relief.
When paying bonuses tax-efficiently though the Small Benefit Scheme, here are a few things you need to look out for.
1. The 1st thing to ensure is that the bonus is an annual one, or if it is not, that only the FIRST BONUS paid in a year is included in the scheme. This is because the Small Benefit Scheme only allows one reward per year to be given tax-free, and if more than one reward is given, the tax break only applies to the first one given in any tax year (Jan-Dec).
2. Salary sacrifice (ie reducing a salary payment in one month and replacing it with a tax-free benefit) is not allowed. Only bonuses that are not part of salary can therefore be included in the scheme. If a bonus is guaranteed, it may form part of an employee’s "normal salary" and therefore would not qualify for tax-free status- check with your finance department or tax advisor.
3. The maximum allowance on the Small Benefit Scheme is €500 per employee (per year). Therefore, if an employee's bonus is less than that, it can be paid entirely tax-free. However, if the bonus is greater than €500, then only €500 may be paid tax-free, with the remainder being paid through payroll at the normal tax and social welfare rates.
4. The tax-free element of the bonus must be in non-cash form. This normally means that a retailer gift card or multi-retailer gift card is used for the €500 tax-free element. However, your choice of card is important – staff do not view all gift cards as equal, as witnessed in the recent Irish Rail labour court dispute. (Hint: The Allgo Rewards Mastercard gift card is a universal gift card that be spent anywhere in the world that accepts Mastercard)
5. If all your employees earn different bonus amounts, it is vital that your gift card provider can accommodate this, and can make the distribution of cards easy, by individually labelling the gift cards and batching them by location, department, supervisor name etc. The importance of getting this right cannot be under estimated.
6. Some companies using the Small Benefit Scheme to pay bonuses tax-free give the employees the option of opting out, and simply getting their full bonus paid via payroll without any tax-savings. Opt-out is much easier and quicker to administer than opt-in. And if you would like to receive a template of the opt-out letter Allgo provides for clients, just contact us.
Paying bonuses through the scheme shows new and existing employees that you are willing to go that extra mile for them by putting a simple scheme in place to boost their earnings. And it sets an example of the proactivity and innovation companies like to encourage in their employees!
If you would like to talk to Allgo about how we can help make your bonuses tax-efficient, please don't hesitate to contact us today
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