Bonus Agreement Template (UK)

A discretionary bonus still has to be exercised rationally

Even a genuinely discretionary bonus is not exercised in a vacuum. The Supreme Court's decision in Braganza v BP Shipping established that an employer's contractual discretion — including over a bonus — must be exercised rationally and in good faith, not arbitrarily, capriciously or unreasonably. A clause reserving an unfettered right to change the criteria or refuse payment for any reason does not remove that constraint; it just makes a dispute about it more likely.

This template states the discretion honestly, ties any change in criteria to a stated notice period and process, and does not pretend the employer's decision is beyond challenge.

Do not put a clawback into the wages-deduction trap

An employer must not make a deduction from a worker's wages unless it is required or authorised by statute, by a relevant term of the contract, or the worker has previously agreed to it in writing — and that agreement cannot authorise a deduction for conduct or an event that occurred before the agreement was given.

This template's clawback clause is drafted around that rule: it is agreed in writing in advance, it does not try to catch conduct predating the agreement, it is bounded by a recovery window and a defined set of triggers, and repayment is sought by invoice with deduction only where the employee has separately and currently authorised it.

Write in good-leaver terms

'Actively employed and in good standing when the bonus is paid' forfeits an award for work already done in circumstances the employee did not choose. This template keeps the active-employment condition as the default but adds carve-outs for death, permanent incapacity, retirement, redundancy or unfair dismissal, and the end of a fixed term, each with a pro-rata payment. Time on maternity, paternity, adoption, shared parental or other family leave counts towards the qualifying period on the same basis as time worked, so a bonus scheme does not indirectly penalise someone for taking leave they are entitled to.

Include the overtime and holiday-pay consequences

A regular or expected bonus can feed into a worker's normal remuneration for holiday pay purposes, and commission-linked or non-discretionary bonuses are the clearest example. This template flags the point so the employer checks whether the specific scheme needs to be reflected in holiday pay calculations, rather than assuming a bonus sits outside them entirely.

Keep confidentiality to the employer's own information

This template does not ask the employee to keep their own pay confidential. Restricting an employee from discussing their pay can itself raise equal pay and discrimination concerns, particularly where it would prevent someone finding out about pay inequality. Confidentiality here covers the employer's financial data and the calculation inputs, not the employee's own compensation.

Clause-by-clause guide

Nature of the bonus

States plainly whether the bonus is discretionary or an earned entitlement on stated conditions.

Targets and calculation

The performance period, the targets, and the formula or amount, with a defined process for setting future targets.

Rational exercise of discretion

Confirms the employer's discretion will be exercised rationally, in good faith and not arbitrarily, consistent with Braganza v BP Shipping.

Eligibility and good-leaver terms

The active-employment condition plus carve-outs for death, incapacity, retirement, redundancy and unfair dismissal, with pro-rating.

Family and other protected leave

Confirms leave counts towards qualifying service and targets are adjusted rather than applied blindly.

Payment and tax

The payment date and confirmation the bonus is subject to PAYE and National Insurance as earnings.

Clawback

Written in-advance agreement, a bounded recovery window and defined triggers, with lawful deduction only where separately authorised.

Confidential information

Protects the employer's business data without restricting the employee's right to discuss their own pay.

No change to employment status

Confirms the bonus does not create a fixed term of employment.

UK compliance checklist

Bonus terms interact with the law on deductions, discretion, holiday pay and equal pay.

• Exercise bonus discretion rationally

  A contractual discretion, including over a bonus, must be exercised rationally and in good faith, not arbitrarily, capriciously or unreasonably.

  Braganza v BP Shipping [2015] UKSC 17

• Get written consent before any clawback deduction

  A deduction from wages needs the worker's written consent given in advance, and that consent cannot authorise a deduction for conduct or an event before the consent was given.

  Employment Rights Act 1996, section 13

• Check the holiday pay treatment of the bonus

  A regular or expected bonus, particularly one linked to results, can need to be reflected in holiday pay calculations. Check the specific scheme rather than assuming a bonus is always excluded.

• Do not restrict pay discussions in a way that risks an equal pay claim

  Keep confidentiality clauses to the employer's business information rather than the employee's own pay, to avoid interfering with an employee's ability to discuss or investigate pay inequality.

• Apply PAYE and National Insurance correctly

  A bonus paid to an employee is earnings for PAYE and National Insurance purposes and should be processed through payroll.

• Check pension scheme rules for pensionable pay

  Whether a bonus counts as pensionable pay depends on the scheme rules. Check them rather than assuming either way.

How to complete the bonus agreement

1. Choose the type of bonus. Decide whether the bonus is genuinely discretionary or an earned entitlement on stated conditions.
2. Set the period and targets. Add the performance period, the targets, and how targets are set for future periods.
3. Set the calculation and payment date. Enter the formula, maximum and payment date.
4. Choose the leaver terms. Switch on the good-leaver carve-outs and confirm the pro-rating basis.
5. Set the clawback terms. Enter the recovery window and triggers, ensuring the employee's written consent is obtained in advance.
6. Sign. Both parties sign and the employee keeps a copy.

Frequently asked questions

Related templates

• Employment Contract Template (UK)
• Hybrid working agreement Template (United Kingdom)