Do One-Off Bonuses Really Help or Should Employers Be Doing More?

Cost of living crisis; energy crisis; inflation crisis; strike crisis; it feels like everywhere you look, there is a crisis going on in the UK. As the nation is stuck in its ‘winter of crisis discontent’, what’s at the heart of most of these crises is money.

In the news recently, we’ve seen some of the most well-known employers giving their staff a one-off bonus to help them out with the cost of living crisis. Whilst it’s been a welcome boost for many, when you break it down and take off the income tax/National Insurance that has to be paid on that bonus, is it really worth it?

What is a one-off bonus?

Rolls Royce, Virgin Media, O2, Lloyds Bank, Monzo, Taylor Wimpey, Irwin Mitchell, Barratt Developments, HSBC… these are just some of the 1 in 20 big companies giving their staff a one-off cost of living bonus in the UK.

Rewarding staff with a bonus is not new; in fact, it’s been around for a very long time – Christmas bonus, performance bonus – but in recent months, it’s been labelled a cost of living bonus and has been handed out to most of the staff employees in a company, rather than a select few.

But the problem with a one-off bonus, for whatever reason it is given (and companies must state the reason for the bonus) is that, in reality, you could actually end up receiving less in your pay packet.

CIPD’s Labour Market Outlook 2022 found that 15% of the UK’s organisations had paid, or were planning to pay their staff a cost of living bonus, with a further 15% of companies reviewing the matter.

The private sector is the most likely to pay one-off bonuses, particularly in the utilities and primary industries (30%), in financial services (26%) and in the construction sector (25%). But although it is a well-meant gesture by employers, it may not be the best, or most welcome, form of help in a financial crisis.

For example, employees on a wage that is supported by benefits could find their benefit payments being negatively impacted, leaving them in no better position financially than they were.  Others may find that it pushes their salary into a higher tax bracket, leaving them open to paying more in income tax and National Insurance.

It’s a dilemma for employees and it’s a dilemma for employers; principally because employers have a duty of care to their employees. It is their responsibility to ensure their wellbeing is supported and protecting them from poverty.

Am I taxed on a one-off bonus?

In one word, yes, you are taxed on a one-off bonus in the same way you’d be taxed on your standard monthly income. How much you pay is determined by your salary and your bonus. This is because your bonus is to your salary and because of that, it could push you into the next tax bracket, leaving you subject to a higher rate of income tax and national insurance.

It is possible to reduce the tax burden on a one-off bonus by paying some, the majority or all of it into your pension fund. Known as a bonus sacrifice, you’ll also benefit from tax relief on that payment.

Alternatives to one-off bonuses

The obvious alternative is a pay rise in line with inflation but the current financial crisis gripping the country is impacting employers as much as it is employees. Companies are also having to deal with higher interest rates, energy costs and inflation. Plus there is the tax issue for employees to consider. So, what other ways can employers help their staff with the cost of living crisis?

• Fringe benefits – there are a myriad of schemes that employers could use that would help their staff offset their daily costs.
• Incremental payments – instead of paying a one-off bonus, spread the payments over a period of six months or more. Not only is the employee paying less tax, but they will also be receiving ongoing support. It also supports those on benefits as it is likely to have less of an impact.
• Medical/health incentives – these can include subsidies for glasses, contact lenses or hearing aids, medical treatments and insurance.
• Subsidised/free meals – many big companies have staff canteens and could offer lower salaried staff heavily subsidised or even free meals as part of a bonus scheme.

So, if you’ve been offered a one-off bonus by your employer, think about whether you’re actually going to be better off. An alternative option might be more favourable for your circumstances.

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