5th August 2015

The Situation with Overtime, Bonus and Commission Payments May Have Changed

On April 1st 2015 the Common Financial Tool came into use for all formal debt solutions in Scotland. Advisers have to use this tool when recording income and expenditure details for their clients. It’s used for Scottish trust deeds, sequestration (bankruptcy), and the debt arrangement scheme. 


Trust deeds that began on or after 1st April 2015 are subject to the new system which uses this new Common Financial Tool to assess income and extra earnings.

Trust deeds that began before 1st April 2015 did not use this tool and are not subject to the new guidance. Extra earnings are subject to the agreement that you made with your trustee when the arrangement was set up. If no specific agreement was made, your trustee has discretion over how any overtime, bonus or commissions that you earn is treated.

Older Trust Deeds

Typically in the past a trustee might base a client’s trust deed payment upon their reliable basic income level. This would normally ignore non-guaranteed extra earnings. The reason for ignoring it was that you could not rely on non-guaranteed income being paid necessarily. Therefore, including it in the calculation for a payment might increase the chances of an agreed payment amount becoming unaffordable in the future.

Instead the client would be responsible for letting the trustee know about any extra earnings received. This might happen on a monthly basis, or periodically when case reviews take place.

Often a trustee would agree to some kind of split of extra earnings such as overtime, a bonus payment or commission received. For example, the client might be able to keep half of the money with the other half being paid into the trust deed. For the debtor this would mean their hard work and success would still be rewarded to some extent, while their creditors could also benefit at the same time.

The Common Financial Tool Guidance

The guidance offered by the Accountant in Bankruptcy about using the Common Financial Tool might suggest that the old type of extra earnings arrangement between a debtor and their trustee is no longer appropriate or allowable.

It states that the contribution payable is the “whole debtor’s surplus”. This could be interpreted to suggest that it’s not appropriate to allow a debtor to keep any of their extra earnings.

It could also be interpreted to suggest that overtime, bonuses, or commission received in the past should be taken into account when working out how much someone should pay into their trust deed in the future. Effectively, this means that a future regular trust deed payment could partially be based upon non-guaranteed income.

Some Concerns

The changes implemented on April 1st 2015 appear to create several concerns:

  1. Partially basing a protected trust deed contribution on a historic non-guaranteed bonus, overtime, or commission payment creates additional risks for all parties. If those extra earnings cease being paid in the future then the agreed contribution is unlikely to remain affordable.

  2. Working overtime hours is typically a voluntary exercise. A debtor who is not allowed to keep any of their extra earnings is highly unlikely to volunteer to work extra hours. Their creditors are therefore likely to receive a smaller dividend than might otherwise have been the case.

  3. Earning a bonus or commission typically involves a high level of focus on individual performance and/or additional hard work. A debtor who will not be able to benefit financially from receiving this extra income is less likely to put in the extra effort or focus required. Once again, the debtor’s creditors are likely to be the biggest losers.

It is however very unclear that this was ever the intention when the Common Financial Tool guidance was created. A recent post by our expert Kevin Mapstone in our forum seems to suggest that:

  1. These concerns might be an unforeseen consequence of how the guidance was drawn up.

  2. The Accountant in Bankruptcy might already be aware that a certain interpretation of this guidance by advisers could be detrimental to the interests of both creditors and debtors.

It may well be the case that revised guidance is issued in the future to counter these concerns.

Trustee Interpretation of Guidance

One common observation over the years that Trust-Deed.co.uk has operated is that different trust deeds providers tend to interpret the guidance and legislation in slightly different ways.

We are aware that some trustees continue to facilitate their clients retaining a proportion of extra earnings. The rationale is that both debtors and creditors can benefit where an incentive to work hard and perform well is kept in place.

Other trustees are interpreting the current guidance much more literally, meaning that fewer incentives can be left in place for their clients.

Anyone who is considering entering into a trust deed might therefore wish to speak with more than one provider in order to be able to compare their approaches to this subject. 

Article Update - 23rd September 2015

David Tannock has recently added an update regarding this subject in our forum.

David’s firm recently received a visit from a very senior representative (John Cook) of the Accountant in Bankruptcy. During the visit it’s reported that Mr. Cook was asked for his views about this subject.

The advice provided was that the AIB expected the contribution for protected trust deeds to be set at the full surplus income of any particular individual. This would therefore include any bonus, commission, or additional overtime earnings.

Mr. Cook provided an example of one individual that earned a fixed salary of £30,000, and a second individual who earned a total of £30,000 which includes some overtime payments or a performance bonus. He asked whether it would it would be fair that the first individual would have to pay more into their trust deed each month than the second person? The potential disparity between these outcomes certainly does appear to be a source of unfairness.

Whether creditors will benefit or lose as a result of this AIB advice remains to be seen. Using the example above, would an individual earning £25,000 per annum choose to work a further £5,000 worth of overtime if all of these extra earnings must be paid over to their trustee? Many people would choose not to do the extra work, meaning that their creditors might eventually receive less of the money that is owed to them.

Irrespective of the above arguments, it seems that trustees now have little discretion in allowing their clients (entering into new trust deeds) to retain a percentage of any extra money that they might earn in the future.         

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