Director Bonuses: Maximising Corporation Tax Relief and Staying Compliant

By Wingate Accountants

Bonuses for directors are a common feature in owner-managed businesses. When structured and documented correctly, they can secure valuable corporation tax deductions. However, poor timing or incomplete records can result in HMRC denying relief, creating cashflow and compliance issues. This article sets out the key considerations, tax rules, and planning tips for companies looking to accrue and pay director bonuses effectively.

Why Pay Director Bonuses?

Many businesses reward directors with performance-based bonuses linked to profits, KPIs, or division performance. From a tax planning perspective, director bonuses can provide flexibility, especially where a loan account needs clearing, or where profit extraction via dividends is constrained.

However, a director’s bonus is treated like salary. It is subject to Income Tax and National Insurance (both employee and employer contributions). Therefore, it must be managed carefully from both a corporation tax and PAYE standpoint.

Timing Is Everything: Corporation Tax Relief

To claim a corporation tax deduction for a director’s bonus in the company’s accounting period, there must be a legal or constructive obligation to pay the bonus by the period-end.

Key criteria include:

A board resolution or written documentation showing intention to pay the bonus.
Bonuses should be capable of reasonable estimation.
Past practice of paying bonuses may create a constructive obligation.

Under Corporation Tax Act 2009, s1288, the accrued bonus must be paid within nine months of the company’s year-end to qualify for deduction in that accounting period. If paid later, the deduction will only apply to the year of payment.

PAYE Treatment: When Is a Bonus ‘Received’?

PAYE operates on the principle of when earnings are “received”, and for directors, this includes several special timing rules under ITEPA 2003, s18. A director’s bonus is treated as received for PAYE on the earliest of:

Actual payment date.
Date entitlement arises – i.e. when all conditions for entitlement are fulfilled.
Date earnings are credited in the company’s records.
Period-end date – if bonus amount is known before period end.
Date the amount is determined – if determined after the period end.

Example – Eden Trading Ltd

On 20 March 2025, the board of Eden Trading Ltd proposes a bonus pool of £75,000 for its three directors, subject to divisional performance. The company’s year-end is 31 March 2025.

On 15 June 2025, final bonus entitlements are confirmed. Bonuses are to be paid on 31 July 2025, provided each director remains employed on 30 June 2025.

Corporation tax deduction: Allowed in year to 31 March 2025, as the bonus was accrued and paid within nine months.

PAYE point: The bonus is treated as received on 15 June 2025 (date determined – rule 3c), so should be included in that tax month’s payroll.

Pension Contributions Instead of Bonuses

Some directors may prefer employer pension contributions in lieu of bonuses. When done through a compliant salary sacrifice arrangement, this can result in:

No income tax or NICs for the director on the sacrificed amount.
Corporation tax relief for the company in the year the contribution is paid (not accrued).

It’s important to document pension sacrifice arrangements properly and ensure that the contribution is paid within the relevant financial year to secure timely relief.

Clearing Director’s Loan Accounts

Bonuses can also be used to clear overdrawn director’s loan accounts in close companies. Where a director has borrowed from the company and is also a shareholder (‘participator’), the company may face a s455 tax charge (32.5%) on the outstanding loan.

However, a properly accrued and paid bonus within nine months of the year-end can be used to repay the loan. This avoids the s455 charge and, as a payment of earnings, is not subject to anti-avoidance ‘bed and breakfasting’ rules (CTA 2010, s464C(6)).

Documentation and Practical Steps

To protect corporation tax relief and ensure PAYE compliance, consider the following steps:

Hold a board meeting before year-end to formally record the bonus proposal.
Ensure the bonus is included in year-end accounts as an accrual.
Confirm entitlement criteria (e.g. performance or service requirements).
Pay the bonus within nine months of the period end.
Run PAYE in the correct period – based on entitlement or determination, not just payment date.

Final Thoughts

Director bonuses can offer a flexible and tax-deductible way of rewarding performance and managing liabilities such as overdrawn loan accounts. But their treatment for both corporation tax and PAYE purposes must be carefully timed and documented.

If you are considering paying director bonuses or wish to review your remuneration planning strategy, Wingate Accountants can help you structure things efficiently and in full compliance with HMRC expectations.

📧 Contact us at: enquiries@wingateaccountants.co.uk