Pay as you earn (PAYE)

PAYE must be applied when salary/bonus is paid to an employee. However, directors can get caught out as PAYE may be due before they get paid.

Delaying tactics

In the absence of special anti-avoidance rules, directors could award themselves a bonus to obtain a tax deduction for the company, then delay physical payment, and PAYE, until much later. Additional rules are therefore in place to ensure that a director is treated as receiving remuneration, e.g. salary or a bonus, on the earliest of:

1. The date when earnings are credited in the company’s accounts or records, even if the director cannot withdraw the funds.
2. Or if the amount of the earnings is decided before the end of the company’s accounting period to which they relate, the date that period ends.
3. But if the amount of the earnings is decided after the end of the period to which they relate, the date the amount is determined.

These rules aim to bring the timing of PAYE in line with the period the bonus is determined, if this happens before payment. The rules are best illustrated with a series of examples.

Rule one

Example. Acom Ltd pays each director a salary of £10,000 per month. This is recorded in the company’s accounting records on the last working day of each month and is treated as paid and received on that day.

Rule two

Example.  At a board meeting on 31 March 2026 the directors of Acom make a resolution to pay themselves a bonus for the year ended 30 April 2026 that will be paid on 30 June 2026. The bookkeeper doesn’t record the bonuses until 28 June 2026. The bonus was agreed during the financial period to which it relates (year ended 30 April 2026). For PAYE purposes, the payment is treated as made on 30 April 2026.

This is commonly misunderstood, with some believing that the bonus should be treated as received on 31 March, i.e. the date the directors’ resolution is made. HMRC’s guidance confirms that this is not correct.

This rule can be used to your advantage if the year end falls shortly after the end of the tax year.

Example. At a board meeting on 31 March 2026 the directors agree bonuses for the year ended 30 April 2026. Making the payment by 5 April 2026 brings the taxpoint into tax year 2025/26, whereas, if it suits personal circumstances, it can be delayed until after 5 April to fall into the 2026/27 tax year. If payment is delayed beyond 30 April, PAYE is due on 30 April 2026.

Rule three

Example.  At a board meeting on 31 March 2026 the directors make a resolution to pay themselves a bonus for the year ended 30 April 2026, but delay confirming the amount of bonus (by resolution) until the draft accounts for the year to 30 April 2026 have been prepared. They meet again on 30 June 2026 and confirm bonuses for the year to 30 April 2026. The bonus is treated as paid and received on 30 June.

While the bonus wasn’t paid until after the end of the accounting period, because the obligation to pay it occurred during that period, Acom is entitled to a tax deduction in its accounts to 30 April 2026.