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I have written a number of blogs about spousal maintenance and particularly the circumstances in which it might be payable by one spouse to the other. In a straight forward case a spousal maintenance order will be made by looking at the receiving spouse’s needs in light of both spouses’ income and the paying party’s ability to pay.
But what happens if a large part of your income is made up of bonus payments? Are the bonuses treated as income in the same way as a basic salary and will you have share it with your spouse?
It is not uncommon for spouses to receive cash bonuses as part of their employment contract, which may be by way of incentive/target-based bonuses or perhaps based on the length of your employment. More often than not, these bonus payments are discretionary and are not guaranteed which, in itself, makes it difficult to assess how much maintenance should be paid where historically bonuses have formed a large part of someone’s annual income.
Where the bonus is relatively small and predictable the court is likely to include it as part of annual income and make orders on this basis: this may be where it has been money relied upon to make ends meet.
In the case of Waggot v Waggot in 2018 the court answered an emphatic ‘no’ to the question as to whether an earning capacity was a matrimonial asset capable of being shared. I wrote about the case at the time – https://www.familylawpartners.co.uk/blog/waggott-v-waggott-is-earning-capacity-an-asset-that-should-be-shared-on-divorce
So how else might the court approach this? How is a bonus treated if you receive it after your separation – is that yours to keep, or available to meet needs as part of a maintenance calculation?
Bonuses which have accrued after you have separated are likely to be the result of the sole endeavour of the party earning it, but the other party may have supported that person in their career. What then? ‘Future earning capacity’ is expressly listed as a factor (under Section 25 of the Matrimonial Causes Act 1973) which the court has to consider when assessing how matrimonial assets should be divided between a couple. However, as the Waggot case tells us an earning capacity is not capable of being a matrimonial asset to which the sharing principle applied.
The sharing principle is one of the three pillars considered by the court: needs, compensation and sharing. Compensation arguments are rarely successful. If sharing is not applicable, needs has to drive the argument when looking at how a bonus should be treated.
This was considered in the case of H v W in 2013. In this case the husband was the managing director of a Russian bank and the majority of his income was made up of discretionary bonuses which were typically almost as large as his basic salary which was c£250,000 pa. The wife argued that her husband’s earning capacity was a matrimonial asset and, as such, the sharing principle should be applied and it should be shared with her, as with the other matrimonial assets.
At trial the judge ordered that the wife should receive maintenance of £3,750 per month plus 25% of the husband’s net annual bonus for the rest of their lives. The husband appealed. He argued that if the bonuses were divided between him and his wife that she would receive money which was in excess of her needs given that she had already been awarded monthly maintenance of £3,750 to meet her living costs. He also argued that she should not receive a share of his bonus as she had not, and would not in the future, make any contribution to his ability to earn such bonuses.
The judge found that the bonuses were needed to help towards the wife’s monthly expenses, because throughout the marriage the family’s standard of living had in part been funded by them. As such she was entitled to receive a percentage of the husband’s annual bonus in the future. However, fundamentally, the judge capped the amount the wife would receive from any future bonus payments to £20,000 per year to meet needs. This was a significant reduction to the original uncapped 25% which had the husband had a particularly good year and earned a bonus of, say, £500,000 the wife would have received £125,000.
The decisions H v W and Waggott highlight the general change in the approach to spousal maintenance over recent years. A less generous approach to spousal maintenance continues with the term of such orders being limited as well as the sums involved. The intention is that parties should be able to move on with their lives knowing that their future wealth and ability to earn is, in some way, protected. But at the same time ensuring that there is an assessment of need which may then have to be met, in part, from income and the balance from any bonuses according to the conditions we have explored above.
Director Lisa Burton-Durham is a specialist divorce and collaborative lawyer and head of our Brighton team.
For more information about Spousal Maintenance, or to arrange a confidential discussion about your personal circumstances, please do not hesitate to contact us.