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ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Marek is a higher rate taxpayer. Taxable bonus of £10,000 is to be paid to him by Orla Ltd in cash. Orla Ltd has already used its employment allowance, is not a small company for any other purpose, and pays corporation tax at 25%. Assume Marek's income exceeds £50,270. What is the total cost to Orla Ltd after corporation tax relief, including employer NIC on the bonus?

The net cost to Orla Ltd is £8,625. The bonus of £10,000 attracts employer Class 1 NIC at 15%, which is £1,500, giving £11,500. Both are deductible for corporation tax at 25%, so the net cost is £11,500 multiplied by 75%.

  1. A£8,625Correct
  2. B£11,500
  3. C£8,750
  4. D£8,625 plus £1,500 of Class 1A

Explanation

Employer Class 1 NIC is 15% × £10,000 = £1,500. The total cost is £11,500. Both the bonus and the NIC are deductible, so the net cost is £11,500 × (1 − 0.25) = £8,625. £11,500 is the gross cost with no relief. £8,750 arises from relieving the bonus only and ignoring NIC (£10,000 × 75% = £7,500 plus £1,500 NIC unrelieved is £9,000, so it is wrong). Class 1A does not apply to cash bonuses.

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