Where an employer wishes to pay employees a "loyalty bonus" when it relocates office, will the payments be subject to tax and national insurance?
Where an employer pays employees a "loyalty bonus" when it relocates office, the bonus is likely to be compensatory in nature and will therefore normally be taxable. The lump-sum payment is compensation for changing employment conditions, ie giving up the right to work at a particular workplace, assuming that no mobility clause is enforceable under the contract of employment, and continuing to work for the employer at a new permanent workplace.
A payment of compensation will normally be taxable, under the general tax charging provision of s.9 of the Income Tax (Earnings and Pensions) Act 2003. Even though no right to receive the payment may exist in the employment contract, the source of the payment is the employment, as it is being paid because of the employment and the related conditions of the employment, and for no other reason.
Where a compensation payment is regarded as employment income for tax purposes, it will normally be treated as earnings for Class 1 national insurance, being remuneration derived from employment. In case of doubt, the employer should contact the relevant tax inspector to obtain advance clearance as to the treatment of any compensatory payments.
An employee may receive tax relief of up to £8,000 where they change their sole or main residence as part of a job-related relocation move. This £8,000 covers qualifying expenses and benefits as detailed in ss.271-285 of the Income Tax (Earning and Pensions) Act 2003. However, it does not include cash bonuses to compensate for any disturbance caused by the move.
An employer can pay a flat-rate disturbance allowance without any tax liability arising for the employee, provided that the expenditure does no more than reimburse qualifying expenses and benefits for the majority of employees. Such allowances are generally requested where it is considered impractical to itemise every type of expenditure, such as all replacement domestic goods. This arrangement should be included in any formal dispensation notice, as agreed between HM Revenue and Customs and the employer.