David Bareham, Share Schemes Director, demystifies the basics of bonus deferral schemes in our latest FS Insight below.

Need to defer bonuses

Many employers within the Financial Services sector apply a bonus deferral scheme. Regulation from the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) requires deferral of a proportion of variable remuneration for certain roles. These rules can apply to both companies and LLPs and are aimed at encouraging longer term success and discouraging short-term risk taking. Some employers also operate deferral on a voluntary basis despite not being required to by regulations.

Ways of deferring

Bonus deferral in most cases takes the following forms:

• Cash based deferral
• Share options
• Units in managed funds

The proportion of variable remuneration that is deferred depends on the role in question. Similarly, the nature and seniority of the role determines the period over which the variable remuneration needs to be deferred.

Expected tax position

Provided structured correctly, deferral should result in the associated income tax and NIC liability also being deferred until the eventual cash payout, exercise of share options or release of fund units to the employee.

If structured correctly, you can expect a corporation tax deduction in line with the amount on which income tax is paid. However, tax inefficiencies can arise if these deferral schemes are poorly structured.

Tax risks to navigate

The risks can depend on whether the scheme is cash-based, share option-based or unit based.

Cash based schemes
The main risk is the timing of the tax payment falling due, which can arise before the cash payment is made to the Employee. Additionally, where the bonus scheme is operated by an entity other than the employing entity, the Disguised Remuneration rules can accelerate the tax point to where funds are ‘earmarked’ for particular employees.

Share option schemes
The Disguised Remuneration rules can again cause the tax point to be crystallised earlier than exercise. Additionally, care must be taken to ensure that the employer benefits from a corporation tax deduction on eventual exercise of the options. Certain share structures may preclude a corporation tax deduction, in these circumstances, it may therefore be more tax efficient to use a cash-based deferral scheme.

Unit based schemes
Care must be taken to ensure that the employer benefits from a corporation tax deduction is due either on award or vesting, as this can be restricted. In some cases, it may be more tax-efficient to tax the bonus up-front and claim a corporation tax deduction, with the net amount then invested in fund units.

How haysmacintyre can help

haysmacintyre has extensive experience in reviewing such bonus deferral schemes. A review of the structure and documents can provide comfort that the tax position is what the employee and employer expect it to be. Where tax risks are identified, haysmacintyre can recommend remedial action to remove or mitigate these risks.

For more information, contact David Bareham, Share Schemes Director.