Introduction
Offering staff a commission or bonus for introducing new clients can be an effective way to grow your business. Employee referral schemes are popular because they reward your team for helping to generate new work while encouraging them to act as ambassadors for your business.
One question employers frequently ask is whether an employee referral bonus tax applies and whether these payments should go through payroll.
In most cases, the answer is yes. If you pay an employee a cash commission for referring a new client, HMRC generally treats that payment as earnings from employment. This means it should normally be processed through your payroll, with Income Tax and National Insurance deducted under PAYE in the usual way.
This guide explains how the rules work, when different treatment may apply, and what records employers should keep.
What Is an Employee Referral Bonus?
An employee referral bonus is a payment made to an employee for introducing a new customer, client or business opportunity that results in new work for the company.
Some businesses pay a fixed amount for every successful referral, while others pay a percentage of the value of the new business won. Whatever structure you choose, the tax treatment usually depends on who receives the payment and why it is being made.
Where the payment is made because someone is your employee, HMRC normally regards it as employment income.
Does an Employee Referral Bonus Go Through Payroll?
Yes, in most cases
If you pay an employee cash commission for referring a new client, the payment will normally be treated as part of their earnings.
This means you would usually:
- Add the commission to the employee’s gross pay for the relevant pay period.
- Calculate PAYE Income Tax using their tax code.
- Deduct employee Class 1 National Insurance where applicable.
- Pay employer Class 1 National Insurance where applicable.
- Report the payment through your normal Real Time Information (RTI) payroll submissions.
Unlike some employee benefits, a cash referral commission is generally not reported as a benefit in kind because it forms part of normal taxable pay.
How PAYE Applies
Because referral commission is generally treated as earnings from employment, it is processed in exactly the same way as salary, wages, bonuses and other cash payments.
Your payroll software will usually include the commission within the employee’s gross earnings for that payroll period before calculating:
- PAYE Income Tax
- Employee National Insurance
- Employer National Insurance
- Pension deductions where applicable
If the commission is paid as a one-off amount, payroll calculations are based on the employee’s total earnings for that particular pay period rather than the annual amount.
National Insurance Treatment for 2025/26
For the 2025/26 tax year, the standard Class 1 National Insurance rates are:
Employee National Insurance
- 8% on earnings between the Primary Threshold and the Upper Earnings Limit.
- 2% on earnings above the Upper Earnings Limit.
Employer National Insurance
- 15% on earnings above the Secondary Threshold.
The main thresholds for 2025/26 are:
| Threshold | Amount |
|---|---|
| Primary Threshold | £242 per week / £1,048 per month / £12,570 per year |
| Secondary Threshold | £96 per week / £417 per month / £5,000 per year |
| Upper Earnings Limit | £967 per week / £4,189 per month / £50,270 per year |
Payroll software will automatically assess whether National Insurance is due based on the employee’s earnings during that payroll period.
Why the Earnings Period Matters
A common misunderstanding is that National Insurance is always assessed using annual earnings.
In reality, Class 1 National Insurance is normally calculated for each payroll period.
For example, if an employee normally earns £2,800 per month and receives a £1,000 referral commission in the same month, payroll will assess National Insurance using the combined monthly earnings. This may result in higher deductions for that month than employees expect.
Understanding this helps employers answer questions from staff when referral bonuses are paid.
When Different Tax Treatment May Apply
Although employee referral bonuses usually go through payroll, there are situations where different rules may apply.
Payments to Self-Employed Introducers
If you pay a referral fee to someone who is genuinely self-employed and not your employee, PAYE will not normally apply. Instead, the recipient is generally responsible for declaring the income through their own tax return where required.
Payments Made in Another Capacity
Different considerations may arise if a payment is made to a director or shareholder in a capacity other than as an employee. The facts of each case will determine the correct tax treatment.
Non-Cash Rewards
If your referral scheme offers gifts or other non-cash rewards instead of money, different tax and reporting rules may apply depending on the nature and value of the reward.
If you are unsure how a particular referral incentive should be treated, professional advice is worthwhile before making the payment.
Good Recordkeeping Matters
As with any payroll payment, keeping accurate records is important.
You should retain evidence of:
- The employee referral scheme.
- The employee who earned the commission.
- How the payment was calculated.
- Payroll calculations.
- RTI submissions.
- Supporting accounting records.
Companies should normally keep payroll and accounting records for six years after the end of the relevant accounting period.
Good recordkeeping helps demonstrate that payments have been correctly processed if HMRC ever reviews your payroll records.
Common Mistakes to Avoid
Employers sometimes make avoidable errors when introducing referral schemes.
Common examples include:
- Paying cash directly without processing it through payroll.
- Forgetting employer National Insurance.
- Assuming referral payments are tax-free.
- Failing to document how commission has been calculated.
- Applying the same treatment to employees and self-employed introducers without considering the differences.
Taking a consistent approach can reduce the risk of payroll errors and unexpected tax liabilities.
Key Takeaways
- Cash referral commission paid to employees is normally treated as employment income.
- Most employee referral bonuses should be processed through payroll using PAYE.
- Employee and employer Class 1 National Insurance may both apply.
- National Insurance is calculated using the relevant payroll earnings period.
- Different tax treatment may apply where payments are made to self-employed introducers or involve non-cash rewards.
Final Thoughts
Rewarding staff for introducing new clients can be an excellent way to encourage business growth while recognising employees for their contribution.
From a tax perspective, however, these payments are usually straightforward. If the commission is paid because someone is your employee, it will normally be treated as earnings from employment and should be processed through payroll with PAYE and National Insurance deductions where applicable.
Introducing a clear referral policy, operating payroll correctly and maintaining accurate records will help ensure your business remains compliant with HMRC requirements.
Message Yorkshire Accountancy for tailored advice.
Frequently Asked Questions
Does an employee referral bonus have to go through payroll?
In most cases, yes. Cash referral bonuses paid to employees are generally treated as earnings from employment. This means they should normally be included in payroll, with PAYE Income Tax and employee National Insurance deducted where appropriate. Employer National Insurance may also be due.
Do I deduct PAYE tax from referral commission?
Usually, yes. Referral commission paid to an employee is normally treated in the same way as bonuses and other cash earnings. Your payroll software will calculate the correct Income Tax using the employee’s tax code.
Is National Insurance payable on referral bonuses?
Where the employee’s earnings exceed the relevant thresholds for the pay period, employee and employer Class 1 National Insurance will usually apply. Payroll software calculates this automatically based on the employee’s total earnings for that period.
Can I pay an employee’s referral bonus outside payroll?
Normally, no. Paying a cash referral commission outside payroll could result in incorrect tax reporting and may create compliance issues. The payment should generally be processed through PAYE.
What if I pay a self-employed introducer?
A referral fee paid to someone who is genuinely self-employed is usually treated differently from a payment to an employee. PAYE will not normally apply, although the recipient may need to declare the income on their own tax return.
Are non-cash referral rewards taxed differently?
Potentially. The tax treatment depends on the type of reward provided and the relevant tax rules. Some non-cash benefits may be subject to separate reporting or tax provisions.
What records should I keep?
You should keep details of your referral scheme, who received each payment, how the commission was calculated, payroll records, RTI submissions and supporting accounting records. Good documentation helps demonstrate compliance if HMRC requests information.
How long should payroll records be retained?
Businesses should normally retain payroll and related accounting records for six years after the end of the relevant accounting period, allowing evidence to be available if required by HMRC.
