How are bonuses taxed in the UK, and can you avoid it?
Receiving a bonus from your employer? Here’s what you need to know about how bonuses are taxed and if you can avoid it.
It’s exciting to find out you’ve been awarded a bonus — and disheartening to realise you’re going to lose a good chunk of it to tax.
But how exactly are bonuses taxed for employees?
And is there anything you can (legally) do to stop your bonus getting taxed?
We explain it all below.
Bonuses are taxed as regular income, potentially pushing you into a higher tax bracket.
Paying your bonus into a pension can reduce tax but limits immediate access.
Any scheme claiming to eliminate bonus tax is illegal and could have serious consequences.
A financial adviser or accountant can help you manage bonuses and optimise tax efficiency legally.
Understanding tax on bonuses
Your bonus will be taxed in exactly the same way as your standard income using the PAYE system.
This means your income tax, national insurance and (if you have them) student loan repayments, will be adjusted for the month you receive your bonus to account for the higher amount.
Frustratingly, that means you won’t get to keep your full bonus unless your income, including the bonus, is under the annual tax-free income allowance of £12,570.
Let’s say you earn £30,000 per year (with student loans and a 5% pension contribution) and your performance at work is rewarded with a £1,000 bonus.
Normally you would pay £290 in income tax and £116 in national insurance on your gross monthly income of £2,500.
However, in your bonus month, you’ll also have equivalent deductions on your £1,000 bonus. This will work out as:
Income tax (20%): £200
National insurance (8%): £80
Student loan (9%): £90
This will leave you with just £630 remaining from your £1,000 bonus.
How are bonuses taxed?
You pay national insurance and income tax on all earned income, including bonuses.
A bonus can also nudge you into a higher tax bracket, meaning you pay an even higher tax rate on some or all of it.
Let’s take the example of someone with an annual income of £45,000, who gets a £10,000 bonus.
Although they normally only pay basic rate tax, they’ll have to pay higher rate tax on the portion of their income over £50,270 (the threshold for higher rate tax).
Here’s a breakdown of how tax would be deducted in this example:
Basic rate income tax (20%): £1,442
Higher rate income tax (40%): £1,117
National insurance (6.3%): £632
Student loan (9%): £900
This would leave you with a bonus payment worth £5,909 after all the necessary deductions have been made.
How can I avoid paying tax on bonuses?
It’s frustrating when your bonus is significantly reduced by tax, but there is a way to keep all of it - so long as you don’t mind waiting a while before you get your hands on it.
By using so-called ‘bonus sacrifice’ (a type of salary sacrifice arrangement), you can keep all of the money, by paying it directly into your workplace pension.
In addition to saving tax, you may also make national insurance savings too. Just note, however, that from April 2029, the amount you can pay into a pension using salary sacrifice and still enjoy NI savings will be capped at £2,000 a year.
You just need to be mindful that you don’t exceed the annual allowance for pensions.
This is currently 100% of your salary, up to a maximum of £60,000 a year.
Check your P60 to see how much you’ve contributed, as you may also be able to carry over any unused allowance from the last three tax years.
The catch is that you won’t be able to access your bonus until you’re at least 55 (or 57 from 2028), or you’ll pay a significant tax penalty.
However, many workplaces will let you designate a portion of your bonus to be sacrificed to your pension, so you can still enjoy some of it now.
If you’re a higher-rate tax payer, defined as those earning between £50,271 and £125,140 annually, you may be hit by a stealthy 60% tax bill.
Learn more: what is the 60% tax trap and how can you legally avoid it?
Be wary of scams
As your bonus is paid by your employer, who must deduct tax before it’s paid to you, there aren’t any other legal routes for reducing the tax you pay on your bonus.
If anyone tells you otherwise, it’s likely to be a scam.
Your employer could be in serious trouble for not correctly taxing your salary, and you’ll have to repay any tax you owe later.
Get expert tax advice
Not sure if you need personal tax advice? You can find a trustworthy tax professional right here at Unbiased.
They’ll help you plan for a tax-efficient future and understand your obligations, particularly if you’re planning to set up your own business or move to self-employment.
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