A Cash Profit Sharing Scheme is a type of employee incentive plan designed to reward employees with a share of the company’s profits. This scheme is an effective way to motivate employees, improve productivity, and align their interests with the company’s financial performance.
The company makes available a sum of money for distribution to employees, usually calculated as a percentage of net profit. The allocation to each eligible employee can be on an equal basis or, alternatively, be linked to a combination of length of service, salary levels and grades.
Although this arrangement does not offer employee tax reliefs, the scheme is highly motivational for staff, and the pay-out is corporation tax deductible for the company.
How Cash Profit Sharing Schemes Work
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Establishment: The company outlines criteria and rules for distributing profits, often based on a fixed percentage of annual profits.
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Eligibility: Criteria may include length of service, role, or performance.
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Distribution: Profits are paid as a one-off payment or in instalments (e.g., quarterly or annually).
Benefits of Cash Profit Sharing Schemes
Employee Benefits:
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Direct financial reward linked to company performance.
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Stronger alignment with company goals.
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Transparent distribution criteria that build trust.
Company Benefits:
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Boosts productivity and motivation.
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Helps retain talented employees.
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Payments are corporation tax deductible.
Profit Related Pay Scheme (PRPS)
A Profit Related Pay Scheme (PRPS) is another way of linking employee rewards to company performance, but with a stronger focus on salary linkage and, historically, tax advantages. Unlike cash profit sharing, PRPS ties a portion of an employee’s pay directly to company profits, so part of their regular income is variable depending on results.
While HMRC’s original statutory PRPS framework (with Income Tax relief) was withdrawn in 2000, many businesses still use profit-related pay arrangements as part of their modern incentive structures. These are designed to:
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Motivate staff by linking pay directly to company success.
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Encourage a “shared responsibility” culture.
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Offer flexibility — PRPS can be set as a fixed percentage of salary or linked to performance targets.
How Profit Related Pay Schemes Work
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Design: A proportion of employees’ regular pay is linked to company profitability.
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Calculation: The amount is often expressed as a percentage of base salary.
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Payment: Typically made alongside normal salary, adjusted based on performance and profit levels.
Benefits of Profit Related Pay Schemes
Employee Benefits:
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Clear link between pay and company performance.
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Encourages employees to contribute to profit growth.
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Can supplement other incentive schemes (e.g., share options).
Company Benefits:
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Creates a culture of accountability and ownership.
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Pay flexibility helps align costs with profits.
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Supports retention by rewarding strong business performance.
Cash Profit Sharing vs Profit Related Pay
| Feature | Cash Profit Sharing Scheme | Profit Related Pay Scheme |
|---|---|---|
| Structure | Lump-sum bonus from profits | Part of salary linked to profits |
| Tax Benefits | Corporation tax deductible | Historical Income Tax relief (ended 2000), but still deductible for employers |
| Distribution | Quarterly, annually, or one-off | Paid as part of salary cycle |
| Focus | Employee bonus incentive | Ongoing link between pay and profit |
| Best for | Boosting motivation & rewards | Embedding performance alignment into pay |
👉 Both Cash Profit Sharing and Profit Related Pay Schemes can play a valuable role in a company’s overall reward strategy. Choosing between them depends on whether you want to offer occasional profit-driven bonuses or embed profit linkage into employee salaries.
📞 Get in touch with David Craddock today to discuss which profit-sharing approach best suits your business.