A bonus paid after the year end belongs in that year’s accounts if, at the reporting date, the company had a present legal or constructive obligation to pay it because of past events and can estimate the amount reliably. That is the test in paragraph 28.8 of FRS 102. A contractual or formula bonus earned by service in the year will usually pass it; a genuinely discretionary bonus decided after the year end, with no prior commitment, will not.

What does FRS 102 say about bonuses?

Bonuses are employee benefits under Section 28. Paragraph 28.4 lists profit sharing and bonuses as short term employee benefits where they are expected to be settled wholly before 12 months after the end of the reporting period in which the employees render the related service. Paragraph 28.5 measures short term benefits at the undiscounted amount expected to be paid for that service.

Paragraph 28.8 then sets the recognition rule specific to bonuses. The expected cost is recognised only when the entity has a present legal or constructive obligation to make the payments as a result of past events, which the standard explains as having no realistic alternative but to pay, and a reliable estimate of the obligation can be made. Micro entities using FRS 105 apply the same wording in paragraph 23.7 of that standard, and small companies using Section 1A apply the full Section 28 rule.

So the question is never simply “has the bonus been paid?” or “has the board approved it?”. It is whether, on the last day of the year, the company was already committed.

When does a contractual bonus need accruing?

A legal obligation arises where an employment contract, bonus scheme rules or a signed letter entitle staff to a payment based on performance in the year. Typical examples are a sales commission plan, a percentage of profit pool set out in scheme rules, or a fixed bonus for hitting stated targets. If the targets were met during the year, the obligation exists at the year end even though the figure is only calculated afterwards.

The estimate should reflect the scheme’s conditions. If staff must still be employed on the payment date, the accrual allows for expected leavers. If the pool depends on audited profit, the figure is based on the profit in the draft accounts. Employer’s National Insurance and any employer pension contributions on the bonus are part of the cost and should be accrued with it, in the same way as for a holiday pay accrual.

Can a discretionary bonus create an obligation?

Yes, if the company’s own conduct has created one. The FRS 102 glossary defines a constructive obligation as one deriving from an entity’s actions where, by an established pattern of past practice, published policies or a sufficiently specific current statement, it has indicated that it will accept certain responsibilities, and as a result has created a valid expectation in those other parties that it will discharge them.

Calling a bonus “discretionary” in the handbook does not settle the point. A company that has paid a Christmas bonus to all staff every year for a decade, calculated on a consistent basis, may have no realistic alternative but to pay it again. Equally, a managing director’s email before the year end telling staff that “everyone will receive a bonus of one week’s pay for this year” is a sufficiently specific statement.

By contrast, where the board decides after the year end, for the first time, to reward staff for a good year, there was no obligation at the reporting date. Paragraph 21.6, which sets out the general idea of a present obligation, makes the point that obligations arising from the entity’s future actions do not qualify however likely they are. The cost belongs in the year in which the decision creates the obligation.

What if the amount is fixed after the year end?

Section 32 deals with this directly. Paragraph 32.5(d) lists as an adjusting event the determination after the end of the reporting period of the amount of profit sharing or bonus payments, if the entity had a legal or constructive obligation at the end of the period to make them as a result of events before that date. Paragraph 32.3 says the relevant period runs up to the date the accounts are authorised for issue.

So the order of reasoning is: first establish that the obligation existed at the year end; then use the post year end calculation, payroll run or board minute as evidence of the amount. If the obligation itself only arose after the year end, the later information is not an adjusting event. Events after the reporting period covers the distinction in more detail.

What does a worked example look like?

Illustration only. A company with a 31 December year end has two arrangements.

  • Scheme A. Written rules give the sales team 5% of gross profit above £400,000, paid in March to those still employed. Gross profit for the year is £600,000, so the pool is £10,000. One of the five members of the team has resigned and will leave in February. The accrual is £8,000 plus employer’s National Insurance.
  • Scheme B. The directors have never paid a general bonus before. In February they decide to pay £500 to each of 20 staff because the year went well. There was no announcement, policy or practice before 31 December, so nothing is accrued for this year. The £10,000 is charged in the following year.

If, in Scheme B, the directors had told staff in November that a bonus would be paid if the year’s results beat budget, and the results did, the November statement would have created a valid expectation and the bonus would be accrued.

What about bonuses deferred for more than a year?

Where a bonus is not expected to be settled wholly within 12 months after the year end, for example a retention bonus payable only if the employee is still employed in three years’ time, it is not a short term benefit. Paragraph 28.29 lists profit sharing and bonuses among other long term employee benefits, and paragraph 28.30 measures the liability at present value using the discount rate methodology in paragraph 28.17, with the net change taken to profit or loss. In practice the cost is built up over the period the employee must work to earn it, rather than charged in full in the year the award is made.

When is an accrued bonus deductible for tax?

An accrual that complies with FRS 102 is normally the starting point for the tax computation, but section 1288 of the Corporation Tax Act 2009 overrides the timing for remuneration. If an amount charged for employees’ remuneration is not paid before the end of nine months after the end of the period of account, the deduction is given in the period in which it is paid, and no deduction is allowed if it is never paid. HMRC’s guidance at BIM47130 says remuneration is paid when it is treated as received for employment income purposes, and BIM47135 confirms the rule covers a global bonus sum whose allocation to individuals had not been decided at the year end.

For directors the “paid” date can come earlier than the cash payment, which is covered in unpaid director bonuses and the nine month rule. How the employee is taxed on the bonus is explained in how bonuses are taxed. Where the deduction moves to a later period, the difference is a timing difference for deferred tax purposes.

What mistakes come up most often?

  • Accruing a bonus the board only decided on after the year end, with no prior commitment, to smooth profits between years.
  • Leaving out a contractual or formula bonus because the amount had not been calculated by the year end.
  • Assuming that the word “discretionary” in a contract prevents a constructive obligation, despite years of consistent payments.
  • Forgetting employer’s National Insurance and pension contributions on the accrued amount.
  • Claiming a tax deduction for an accrual that is not paid within nine months.
  • Treating a multi year retention bonus as a short term accrual rather than spreading it over the service period.

The general rules on liabilities of uncertain timing or amount are in FRS 102 Section 21: provisions and contingencies, and the distinction between an accrual and a provision is explained in accruals and prepayments.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.