You have a profitable year. Your key employee delivered. You want to pay them a £20,000 bonus. Then you think: what if I pay that bonus through a separate limited company I also control? The bonus comes from Company B, not Company A. Company B has no other activity. You hope the payment avoids employer National Insurance at 13.8% on Company A's payroll, and maybe employee NI too.

This is a known arrangement. HMRC has seen it hundreds of times. And they have specific legislation to shut it down. The short answer is no, you cannot pay a bonus through a separate company to avoid NI. The longer answer involves disguised remuneration rules, the general anti-abuse rule (GAAR), and potential penalties that far exceed the NI you tried to save.

What the Arrangement Looks Like

Typically, a director sets up a second limited company. Let us call them Company A (the trading business) and Company B (the bonus vehicle). Company A pays a sum to Company B, often described as a management fee, a consultancy charge, or a services payment. Company B then pays the bonus to the employee.

The employee receives their money. Company A claims a corporation tax deduction for the fee. Company B pays no corporation tax because it has no profit (the fee income equals the bonus paid). And nobody pays employer NI or employee NI on the bonus itself.

That is the theory. In practice, HMRC treats this as a tax avoidance scheme. The disguised remuneration rules in Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) are designed specifically to catch arrangements where an employee receives value from a third party in connection with their employment.

Why the Disguised Remuneration Rules Catch This

The disguised remuneration rules apply where a person (the employee) receives a benefit from a third party (Company B) and the benefit is linked to their employment with Company A. The definition of "linked to employment" is broad. It covers any arrangement where the main purpose, or one of the main purposes, is to avoid tax or NI.

In the bonus-through-separate-company scenario, HMRC will argue that Company B is acting as a conduit. The employee's entitlement to the bonus arises from their work for Company A. Company B is simply the payment vehicle. The bonus is therefore treated as earnings from the employment with Company A.

The result: the full amount is subject to PAYE income tax and Class 1 National Insurance (employer and employee). Company A is liable to account for the tax and NI, even though the money physically moved through Company B. And Company A cannot claim a corporation tax deduction for the fee paid to Company B if the fee is caught by the disguised remuneration rules. HMRC can also issue a Part 7A charge on Company B for failing to operate PAYE.

In practice, HMRC opens enquiries into these arrangements within 12 to 18 months of the return being filed. The enquiry can go back further if they suspect deliberate non-disclosure.

The GAAR Risk

If the disguised remuneration rules do not catch the arrangement, the General Anti-Abuse Rule (GAAR) almost certainly will. The GAAR applies to arrangements that are "abusive", meaning they cannot reasonably be regarded as a reasonable course of action. Routing a bonus through a shell company with no commercial purpose other than avoiding NI is exactly the kind of arrangement the GAAR targets.

GAAR penalties start at 60% of the tax advantage. HMRC can also publish your name and details if the tax advantage exceeds £25,000. That is a reputational risk most business owners do not want.

Real Numbers: What the Penalties Look Like

Let us use a concrete example. A director in Manchester pays a £20,000 bonus through a separate company. The NI saved is 13.8% employer NI plus 2% employee NI (at the relevant rates) on the bonus. That is about £3,160 in total NI avoided.

HMRC opens an enquiry. They apply the disguised remuneration rules. The £20,000 is treated as earnings. The director's company now owes:

  • PAYE income tax at 40% (if the director is a higher rate taxpayer): £8,000
  • Employer Class 1 NIC at 13.8%: £2,760
  • Employee Class 1 NIC at 2%: £400
  • Interest on late payment: typically 4.25% per year, running from the original due date
  • Penalties: up to 100% of the tax understated for deliberate non-disclosure

Total potential liability: £11,160 in tax and NI, plus interest and penalties that could double that figure. The original NI saving of £3,160 is dwarfed by the penalties. And you still have the cost of setting up and running Company B, filing its accounts, and dealing with the enquiry.

What About Loans or Director's Loan Accounts?

Some variations of this scheme use a director's loan account. Company A lends money to Company B. Company B pays the employee. The loan is not repaid. The intention is that the employee never repays the loan, so it becomes a benefit in kind or a deemed dividend.

HMRC treats this the same way. If the loan is made for the purpose of remunerating an employee, it is caught by the disguised remuneration rules. The loan itself is treated as earnings. PAYE and NI are due on the loan amount, not on the eventual write-off.

The only exception is where the loan is a genuine commercial loan with a proper repayment schedule and no connection to the employee's remuneration. That is rare in practice.

Legitimate Alternatives to Paying Bonuses

If you want to reward employees without triggering the full NI burden, there are legitimate routes. None of them avoid NI entirely, but some reduce the cost.

Trivial Benefits

You can provide trivial benefits of up to £50 per employee per benefit, with an annual cap of £300 for directors of close companies. These are exempt from tax and NI. A £50 gift voucher for Christmas or a birthday is fine. A £20,000 bonus is not a trivial benefit.

Salary Sacrifice Schemes

Certain salary sacrifice arrangements can reduce NI. Pension contributions are the most common example. Employer pension contributions are exempt from employer NI and employee NI. You can sacrifice bonus into a pension scheme. The employee gets the full contribution into their pension, and you save 13.8% employer NI. The employee saves their marginal rate of NI too.

Other salary sacrifice schemes (cycle to work, electric cars) also reduce NI but are limited in scope. They do not work for cash bonuses.

Share Schemes

Share incentive plans (SIPs) and share option schemes (EMI, CSOP) allow employees to receive shares or share options without immediate tax or NI. The NI saving is real, but the schemes require formal documentation, HMRC registration, and ongoing compliance. They work best for companies planning long-term growth and exit.

Dividends for Shareholder Employees

If the employee is also a shareholder, you can pay dividends instead of bonuses. Dividends carry no NI. But dividends are paid from post-tax profits (after corporation tax), and the employee pays dividend tax at 8.75%, 33.75% or 39.35% depending on their income band. The overall tax cost is often lower than a bonus, but only if the employee holds shares. You cannot pay dividends to non-shareholders.

What HMRC Looks For

HMRC uses data matching and risk profiling to identify companies that might be using bonus-through-separate-company arrangements. Red flags include:

  • A dormant or low-activity company making payments to employees of a connected company
  • Management fees paid to a company with no staff, no premises, and no commercial activity
  • Payments described as "consultancy fees" to a company controlled by the same director
  • Loan accounts between connected companies that are not repaid

If your company shows any of these patterns, expect an HMRC compliance check. The enquiry will likely cover the last 4 to 6 years of returns.

What to Do If You Are Already Using This Arrangement

If you have already set up a bonus-through-separate-company structure, you have options. The safest is to disclose the arrangement to HMRC under the Contractual Disclosure Facility (CDF) if you believe it is deliberate tax avoidance. The CDF gives you a reduced penalty in exchange for full disclosure.

Alternatively, you can unwind the arrangement voluntarily. Close Company B, bring the bonus payments onto Company A's payroll, and settle the outstanding tax and NI through a voluntary disclosure. HMRC's penalty regime is more lenient for unprompted disclosures than for those made after an enquiry opens.

Speak to an ICAEW qualified accountant before doing anything. The disclosure process is technical, and the wrong wording can trigger a full criminal investigation.

Final Word

Paying a bonus through a separate limited company to avoid NI does not work. HMRC has the legislation, the resources, and the appetite to pursue these arrangements. The penalties can easily exceed the NI saved. If you are considering this route, stop. If you are already using it, disclose it.

For most businesses, the legitimate alternatives (pension contributions, share schemes, dividends for shareholders) deliver better outcomes with lower risk. If your bonus structure is complex, talk to us. We can model the tax and NI costs of each option and help you choose the right one for your business.