EOTs (Employee Ownership Trusts) Tax Free Bonuses

EOTs and Tax-Free Bonuses

In this article, we discuss the tax-free bonuses that employees could benefit from in an employee-owned company.

Under a qualifying EOT structure, as indirect owners, the employees are eligible to receive a share of the profits of the business.

Profits that have been generated can be distributed from the trading company to the employee-owners by way of bonuses through the payroll.

Providing certain key conditions are met, each employee will be exempt from income tax on the first £3,600 of bonuses per year. These are great tax benefits to employees.

Conditions for EOT Tax-Free Bonus

To qualify, the tax-free bonus must meet the ‘participation’ and ‘equality’ requirements, this means that:

• These tax-free bonuses must be made payable to all eligible employees (a minimum qualifying probation period is permitted);
• Eligible employees must participate ‘on the same terms’ but can be determined by one of the following conditions: remuneration, length of service, or hours worked.

Should these conditions be breached, the bonus would be subject to income tax at the employee’s marginal rate.

Of course, the company can pay bonuses in excess of £3,600 per employee, but the tax relief is limited to the first £3,600 per employee per annum.

It should be noted that the shareholders do not need to sell the entire share capital of the company to the trust on disposal. In fact, the shareholders can retain up to 49% of the shares (resulting in 51%, and hence a majority/controlling interest held by the trust).  In this situation, the shareholders are entitled to receive a proportion of the distributable reserves in the company equal to their percentage shareholding. The proportion held by the trust will be available to distribute to the employees via bonuses.

Our EOT advisers

We have advised many businesses to complete their transition to employee ownership. Hawsons have been working with businesses on EOTs since they were introduced in 2014, completing our first deal in 2016.

We are a member of the Employee Ownership Association who represent organisations that are employee-owned or transitioning to employee ownership across the UK.

Find out more about our EOT advisory service

Pete leads the Corporate Finance offering across the firm, having has spent much of his career within a large international accountancy firm and corporate banking before returning to Hawsons, where he started. Working with businesses of all sizes, Pete has an exceptional breadth of experience which he brings to the benefit of clients.

An early adopter and passionate believer in good employee ownership, Pete has helped numerous businesses transition to employee ownership and works extensively to promote the employee ownership model.