Five key rules for paying EOT bonuses

If your company is owned by an Employee Ownership Trust, you can pay your employees an income tax-free bonus every year. You can pay up to £3,600 to each employee. 

Often, companies wait till the sellers’ debt has been paid off before they pay bonuses.  More and more companies that sold to an EOT a few years ago are now reaching that point, and are starting to consider how the bonus payments work in practice. 

Key points to consider when paying an EOT bonus

It’s sensible to check these are in hand before you go ahead:

  1. The payments must be bonuses. You can’t use the tax-free amount to pay what would be ordinary salary. 
  2. You need to include all employees, although you can set a minimum period of continuous service.  That can’t be more than 12 months.
  3. In some circumstances you can exclude employees who are under disciplinary proceedings.  However, this is usually limited to gross misconduct, so take advice if you’re considering this.
  4. You don’t need to pay everyone the same amount.  You can calculate the bonus on the basis of hours worked, length of service, and salary.  However, if you do that you need to be careful that you’re not giving high earners or directors disproportionately more than more junior or lower paid staff.  You also need to be careful not to give higher levels of benefit to people just because they carry out particular jobs or work in particular sectors. 
  5. If you’re calculating the bonus using one of the measures above, it mustn’t result in some employees getting nothing at all.

Whatever approach you take, it should be formally documented, including getting agreement from your trustees and the board of directors. 

More information

HM Revenue & Customs have a helpful manual giving more information on income tax-free EOT bonus payments here

If you need more advice on how to manage your EOT bonus arrangements, contact us on to arrange a call with one of our experts.