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Handling bonuses and benefits

Bonuses and allowances can be a great way to boost the overall package you’re able to offer a new employee. They can also be an excellent way to attract and retain good staff. Learn what you need to know about paying the relevant taxes.

Performance bonuses or incentives are paid in addition to your employee’s base salary. They’re usually linked to agreed performance measures, so the amount of the bonus you pay depends on how well the employee has performed during the year. For example, bonuses and incentives can be paid for meeting sales targets or project milestones.

Bonuses are taxed depending on their type and frequency.

Frequent and regular bonuses are treated as part of an employee’s earnings and have PAYE deducted. A one-off bonus (such as an annual bonus) or a redundancy or retirement payment is treated as a lump sum payment.

More information is on the Inland Revenue website:

Fringe benefit tax

Fringe benefit tax (FBT) is a tax on benefits employees receive through their work.

There are four main types of taxable fringe benefits:

  1. motor vehicles available for private use
  2. free, subsidised or discounted goods and services
  3. certain low-interest loans
  4. employer contributions to some funds, insurance and superannuation schemes.

Read Fringe benefit tax for more information.

Employee allowances

These are payments made to an employee in addition to their salary or wage and can include payments for accommodation, meals or clothing. Some allowances are taxable and some aren’t.

Read our page on Employee allowances for more information.

Allowances (external link)  — Inland Revenue

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