A company controlled by an Employee Ownership Trust can pay each eligible employee up to £3,600 per tax year completely free of income tax. That is the core of the EOT tax-free bonus: a cash payment, capped annually, that escapes income tax when the company, the trust, and the scheme itself all meet strict qualifying conditions. National Insurance is a different story, and getting any one condition wrong can strip the entire payout of its tax-free status.
How the £3,600 Cap Works
The £3,600 figure is a cumulative annual ceiling per employee, running across the tax year from 6 April to the following 5 April.1HM Revenue & Customs. Employment Income Manual – EIM03050 It is not a per-payment limit. A £2,000 bonus in July and another £2,000 in December means £3,600 escapes income tax and the remaining £400 is taxed as ordinary earnings at the employee’s marginal rate.
The bonus must be paid in cash. If part of a qualifying bonus is delivered as shares through a share incentive plan, only the cash portion qualifies.2HM Revenue & Customs. Employment Income Manual – EIM03051 Anything above £3,600 goes through payroll and is taxed normally.
If an employee works for several companies in the same corporate group, and each is controlled by the same EOT, the £3,600 cap applies across all of them combined.2HM Revenue & Customs. Employment Income Manual – EIM03051 Where the employers are not grouped, each gets its own separate £3,600 allowance. The cap has not moved since October 2014 and is not indexed to inflation.
The Equal Treatment Rule
Every qualifying employee must be eligible to take part on the same terms. A company cannot pick out senior staff for bonuses while leaving everyone else out. Payment amounts can vary, but only when calculated using one or more of three objective factors: the employee’s remuneration, their length of service, or the hours they work.3HM Revenue & Customs. Employment Income Manual – EIM03054 Where more than one factor is used, each must produce a separate entitlement and the total is the sum of them, not a multiplied product.
Any other measure, such as subjective performance ratings or job title, disqualifies the whole payout from being tax-free. The company can impose a minimum period of continuous employment before eligibility kicks in, but it cannot exceed 12 months and must apply consistently.4HM Revenue & Customs. Employment Income Manual – EIM03053
The rule reaches across the whole corporate group. A parent that pays its own staff while ignoring subsidiary employees fails the test. If the equality requirement is not met, every payment is treated as regular wages subject to income tax in full.
Directors Can Be Left Out
For qualifying bonus payments made on or after 30 October 2024, the participation requirement is not broken if the company excludes directors entirely.4HM Revenue & Customs. Employment Income Manual – EIM03053 This solved an awkward problem. Former owners who stayed on as directors previously had to be included in the scheme on equal terms even though they were personally barred from receiving the tax-free element. Companies can now leave directors out of the bonus calculation altogether without upsetting anyone else’s tax treatment.
Employees Who Cannot Receive It Tax-Free
Not everyone on the payroll qualifies. Anyone who holds, or has held within the previous ten years, a beneficial interest in 5% or more of any class of the company’s shares is treated as an excluded participator. Anyone connected to such a person is also caught, including spouses, parents, children, and business partners. The rule is deliberately broad, blocking former owners from routing tax-free income to themselves or their families through the trust.
The company can still pay these people bonuses. But every pound is taxable earnings from the start, with income tax and NIC deducted through payroll like ordinary salary. The ten-year lookback is what catches people out: a founder who sold six years ago still cannot receive the bonus tax-free.
The Company Must Qualify Too
Three structural conditions apply to the company itself. Failing any one blocks the exemption for the whole scheme.
Controlling Interest
The EOT must hold more than 50% of the voting rights, entitlement to profits, and entitlement to assets on a winding up.1HM Revenue & Customs. Employment Income Manual – EIM03050 If the trust’s stake drops below that threshold at any point, the company loses its ability to pay tax-free bonuses until the position is fixed.
Trading Activity
The company must carry on substantially trading activities rather than operating as an investment vehicle. HMRC does not apply a rigid percentage, but its internal guidance treats non-trading activity below roughly 20% of the overall business as unlikely to cause a problem.5HM Revenue & Customs. Capital Gains Manual – CG64090 Companies with significant rental income, investment portfolios, or dormant subsidiaries should look at this carefully.
Limited Participation
The participator fraction cannot exceed two-fifths at any relevant time. It broadly measures the proportion of the workforce made up of participators in the company, which catches shareholders, loan creditors, and others with a financial stake beyond employment.6HM Revenue & Customs. Capital Gains Manual – CG67855 If former owners and their associates make up too large a share of headcount relative to the wider workforce, the company falls outside the rules.
National Insurance Still Applies
The income tax exemption does not extend to National Insurance. Both employer and employee pay Class 1 NIC on the full bonus, even when it sits well within the £3,600 cap.1HM Revenue & Customs. Employment Income Manual – EIM03050 This surprises more people than any other feature of the regime.
For the 2025–2026 and 2026–2027 tax years, the employer rate is 15% on earnings above the secondary threshold.7GOV.UK. Rates and Allowances: National Insurance Contributions The standard employee rate (category A) is 8% between the primary threshold and the upper earnings limit, dropping to 2% above it.8GOV.UK. National Insurance Rates and Categories So a £3,600 bonus shows up on the payslip with no income tax but an NIC deduction, and the employer pays its 15% on top.
Because the bonus attracts employer Class 1 NIC, it also counts toward the annual pay bill used to calculate the Apprenticeship Levy for employers whose total pay bill exceeds £3 million.9GOV.UK. Pay Apprenticeship Levy The NIC and any levy cost need to be factored into bonus planning, not just the headline cash figure.
If the Trust Loses Qualifying Status
The consequences depend on which relief is at stake. For vendors who claimed capital gains tax relief when they sold their shares into the trust, a disqualifying event within the clawback period revokes the relief entirely, and the CGT falls due as though the exemption never existed, plus any interest.
The income tax exemption on bonuses works differently. The legislation frames it as applying to each payment at the moment it is made, based on whether the conditions are satisfied at that point. Bonuses that genuinely qualified when paid do not appear to be retrospectively stripped of their tax-free status. But the company cannot make further tax-free bonuses once it falls outside the qualifying conditions. Anything paid after that point is fully taxable as ordinary earnings.
Universal Credit and Payroll Coding
Because qualifying EOT bonuses are exempt from income tax, they are not counted as taxable earnings for Universal Credit purposes. The Department for Work and Pensions uses Real Time Information data from HMRC to assess claimants’ earnings, so the employer’s payroll must code the bonus correctly as non-taxable. If an RTI submission reports the bonus as standard earnings by mistake, a claimant can see their Universal Credit reduced or suspended until the error is corrected. Employers with staff on Universal Credit should confirm their payroll provider knows how to categorise these payments.