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Audio Summary of Key Points of the Article:
Understanding Bonus Taxation in the UK (Overview and Key Facts)
Receiving a bonus at work is always exciting—it’s a tangible reward for your hard work and dedication. However, it’s often bittersweet when you notice how much of that bonus goes toward taxes. If you’re asking, “How much tax should I pay on my bonus in the UK?” you’re not alone. Many employees are surprised by the deductions, so let’s dive into how bonus taxation works, the key figures for 2025, and what you can expect.
What Is a Bonus, and Why Is It Taxed?
A bonus is an additional payment on top of your regular salary, often awarded for meeting targets, achieving milestones, or as part of profit-sharing arrangements. In the UK, bonuses are treated as part of your total earnings. This means they are subject to Income Tax and National Insurance Contributions (NICs) just like your salary.
Key fact: Bonuses are taxed under the PAYE (Pay As You Earn) system. This system combines your salary and bonus, calculating tax and NICs based on the cumulative total. The tax deduction often feels larger because bonuses can push you into higher tax brackets.
2025 Income Tax Rates and National Insurance (NI) Contributions
As of January 2025, the following tax rates apply to bonuses and salaries in the UK:
Income Bracket (2025) | Tax Rate (Income Tax) | National Insurance (Class 1) |
Up to £12,570 (Personal Allowance) | 0% | 0% |
£12,571 – £50,270 (Basic Rate) | 20% | 12% |
£50,271 – £125,140 (Higher Rate) | 40% | 2% |
Over £125,140 (Additional Rate) | 45% | 2% |
Important updates for 2025:
The Personal Allowance remains frozen at £12,570 until 2028, meaning more of your earnings (including bonuses) may be subject to tax.
The Higher Rate threshold begins at £50,271, and the Additional Rate kicks in at £125,140. Bonuses that push your income into these thresholds will face higher tax rates.
National Insurance rates remain consistent, with a 12% main rate and a 2% rate for earnings above £50,270.
Why Bonuses Feel Over-Taxed
If you’ve ever thought, “My bonus is taxed more heavily than my salary,” you’re not alone. The truth is, bonuses aren’t taxed at a higher rate. Instead, they are combined with your monthly salary for tax purposes. For instance:
If your monthly salary is £3,000 and you receive a one-off bonus of £5,000, your total pay for that month becomes £8,000.
The PAYE system assumes that this higher monthly total will continue throughout the year, which can temporarily push you into a higher tax bracket.
This overestimation is adjusted over the tax year, but the initial deduction can feel steep.
Example:
Monthly salary: £3,000
Bonus: £5,000
Taxable income for the bonus month: £8,000
Likely deductions for the bonus month (including tax and NICs): Around 42%, depending on your overall annual earnings.
Bonus Taxation Example for 2025
Let’s break it down further with an example:
Your annual salary: £40,000.
Bonus: £5,000 (one-time payment).
Total taxable income: £45,000.
£12,570 of your income is tax-free (Personal Allowance).
£32,430 (salary + bonus - allowance) is taxed as follows:
First £37,700: 20% tax (£7,540).
No income in higher-rate bands, as the total remains under £50,270.
National Insurance:
£37,700 taxed at 12% (£4,524).
For this example, you’ll pay approximately £7,540 in tax and £4,524 in NICs on your income, including the bonus.
Marginal vs. Effective Tax Rates on Bonuses
It’s important to distinguish between marginal tax rates and effective tax rates:
Marginal Tax Rate: The rate applied to your next pound of income. For many, this is 20%, 40%, or 45%.
Effective Tax Rate: The overall percentage of your income that goes to tax and NICs. Bonuses often cause your marginal tax rate to spike temporarily, but your effective rate adjusts over the year.
For example:
If your bonus pushes you into the higher tax band for just one month, only the portion above the threshold will be taxed at 40%. The rest remains at 20% or lower.
Can You Avoid Paying Tax on a Bonus?
Unfortunately, you can’t avoid paying tax and NICs on bonuses. However, there are legal ways to minimize your tax liability:
Salary Sacrifice: Redirect part of your bonus into a workplace pension scheme. This reduces your taxable income and boosts your retirement savings.
Use Tax-Free Allowances: Maximize ISAs or other tax-free investments with your bonus.
Spread Payments: Negotiate with your employer to stagger bonuses across tax years, avoiding higher-rate bands.
The Role of Employers in Bonus Taxation
Employers play a crucial role in determining how bonuses are taxed. They are required to:
Apply PAYE rules to calculate tax and NICs accurately.
Report bonuses through Real-Time Information (RTI) submissions to HMRC.
Issue updated payslips reflecting deductions.
Employees should regularly check their payslips and communicate with payroll if discrepancies arise.
Common Questions About Bonus Taxation
1. Why does my bonus sometimes reduce my take-home pay?
Bonuses can trigger a higher marginal tax rate in the month they are paid. This may temporarily reduce your take-home pay until the PAYE system adjusts your tax code.
2. Does a bonus affect my tax code?
Not directly, but if your bonus changes your overall tax liability, HMRC may issue an updated tax code.
3. Are bonuses taxed differently in Scotland or Wales?
Yes, Scotland and Wales have their own income tax bands, but the PAYE system operates similarly. For instance:
In Scotland, the Basic Rate is 21%, while higher rates start at lower thresholds.
How Tax Rates and National Insurance Work for Bonuses
After understanding the basics of bonus taxation, let’s dive deeper into how income tax and National Insurance Contributions (NICs) are calculated on bonuses in the UK. This section will explain the mechanics of taxation, highlight how thresholds and rates apply, and discuss the practical impact of tax laws on your bonus earnings in 2025.
How Tax Rates Apply to Bonuses
Income tax in the UK is progressive, meaning that higher earnings are taxed at higher rates. Your bonus is not taxed separately from your salary but is added to your annual income. The combined total determines which tax bands you fall into and how much tax you pay.
Income Tax Bands and Rates for 2025 (England, Wales, and Northern Ireland)
Tax Band | Income Threshold | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 – £50,270 | 20% |
Higher Rate | £50,271 – £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Scottish Tax Bands for 2025
Scotland uses slightly different income tax bands:
Starter Rate: 19% on income between £12,571 and £14,732.
Basic Rate: 20% on income between £14,733 and £25,688.
Intermediate Rate: 21% on income between £25,689 and £43,662.
Higher Rate: 42% on income between £43,663 and £125,140.
Top Rate: 47% on income over £125,140.
Bonus Taxation in Practice: An Illustration
Imagine you earn £45,000 annually and receive a £10,000 bonus. Here’s how your income tax is calculated:
Personal Allowance: The first £12,570 of your income is tax-free.
Basic Rate: Your income between £12,571 and £50,270 is taxed at 20%.
Higher Rate: Since your bonus pushes your total income to £55,000, part of it falls into the higher tax band:
The portion above £50,270 (£4,730) is taxed at 40%.
Additional Rate: If your income exceeds £125,140, the excess is taxed at 45%.
Income Range | Tax Rate | Tax Paid |
£0 – £12,570 | 0% | £0 |
£12,571 – £50,270 | 20% | £7,540 |
£50,271 – £55,000 | 40% | £1,892 |
Total Tax on Bonus: £7,540 (Basic Rate) + £1,892 (Higher Rate) = £9,432.
National Insurance Contributions (NICs)
National Insurance is also applied to bonuses, but the structure differs from income tax. Here are the NIC rates for employees in 2025:
Earnings Thresholds | NIC Rate |
Up to £12,570 | 0% |
£12,571 – £50,270 | 12% |
Over £50,270 | 2% |
Example:
If your bonus raises your income to £55,000:
£50,270 minus £12,570 = £37,700 (taxed at 12%) = £4,524.
£5,000 above £50,270 (taxed at 2%) = £100.
Total NICs = £4,524 + £100 = £4,624.
Why Marginal Tax Rates Can Be Misleading
When you receive a bonus, you may feel like the tax deductions are disproportionately high. This perception arises because bonuses temporarily inflate your monthly income, pushing more of it into higher tax brackets. However, it’s essential to remember:
The marginal tax rate only applies to the portion of your income that exceeds each threshold.
Your effective tax rate (average tax rate across your total income) is usually much lower.
For example, in the above case, while the marginal tax rate on the higher portion of your income is 40%, the effective tax rate on your £55,000 total income may be closer to 25%.
Tax-Free Bonuses: Are They Possible?
Some bonuses may qualify for tax exemptions under specific schemes. For instance:
Gift Vouchers or Non-Cash Bonuses: Employers can provide benefits worth up to £50 under the trivial benefits exemption, which is tax-free.
Annual Bonus Linked to Performance: In rare cases, bonuses structured as shares or equity grants may be taxed differently, sometimes offering tax deferral benefits.
Employers should consult tax professionals to ensure compliance with HMRC rules.
The Interaction Between Tax Codes and Bonuses
Your tax code determines how much Personal Allowance you receive and directly affects how bonuses are taxed. If your code is incorrect, you may overpay or underpay tax. HMRC may adjust your code after you receive a significant bonus.
Common Tax Codes:
1257L: Standard code for most employees, allowing the full £12,570 Personal Allowance.
BR: Indicates no Personal Allowance is applied, often used for secondary incomes or emergency tax situations.
If you receive a bonus, check your payslip to ensure your tax code is accurate. Incorrect codes can delay tax refunds or cause unexpected deductions.
How Employers Handle Bonuses and PAYE
Employers are responsible for deducting tax and NICs from bonuses through the PAYE system. They do this by:
Adding your bonus to your monthly salary.
Applying the appropriate tax and NIC rates.
Submitting updated information to HMRC via Real-Time Information (RTI).
While employers calculate these figures, employees should monitor their payslips to ensure accuracy. Mistakes can happen, especially with irregular payments like bonuses.
Impact of Bonuses on Other Tax Considerations
Bonuses can have unintended consequences for your overall financial situation, including:
Child Benefit Tax Charge: If your income (including bonuses) exceeds £50,000, you may have to repay part or all of your Child Benefit.
Pension Contributions: Bonuses are part of taxable earnings, so salary sacrifice schemes can be a smart way to reduce tax liability while boosting retirement savings.
Student Loan Repayments: Bonuses count toward your annual earnings threshold for loan repayments. For Plan 2 loans, repayments start when your income exceeds £27,295 annually.
Why Understanding Tax on Bonuses Matters
Failing to understand how bonuses are taxed can lead to surprises when your payslip arrives. Additionally, not accounting for the tax implications of bonuses can affect financial planning, such as saving for a mortgage deposit or budgeting for major purchases.
Strategies for Minimizing Tax Liability on Bonuses
Now that you understand how bonuses are taxed, you may be wondering how to minimize the impact of taxation and keep more of your hard-earned bonus. While it’s impossible to avoid taxes entirely, there are legal and effective strategies to reduce your tax liability, maximize savings, and make the most of your bonus in 2025.
1. Salary Sacrifice Schemes: Save on Tax and National Insurance
A salary sacrifice scheme allows you to redirect a portion of your income, including bonuses, into non-cash benefits. This reduces your taxable earnings and can result in significant savings on both Income Tax and National Insurance.
Pension Contributions via Salary Sacrifice
By allocating part (or all) of your bonus to a workplace pension scheme, you can lower your taxable income while boosting your retirement savings.
Contributions made via salary sacrifice are exempt from Income Tax and NICs.
Example:
You earn £45,000 and receive a £5,000 bonus.
If you redirect the £5,000 into your workplace pension:
You save 20% in Income Tax (£1,000) and 12% in NICs (£600) for Basic Rate earners.
For Higher Rate earners, the savings are even greater (40% Income Tax and 2% NICs).
Many employers also offer matching contributions for salary sacrifice pensions, further increasing the value of your savings.
Other Benefits via Salary Sacrifice
You can also sacrifice part of your bonus for:
Childcare vouchers (if eligible).
Cycle to Work schemes (reducing tax liability while promoting eco-friendly commuting).
Electric vehicle leasing through salary sacrifice.
2. Spread Your Bonus Across Tax Years
If your bonus significantly increases your income and pushes you into a higher tax bracket, consider negotiating with your employer to spread the payment across two tax years. This can help you stay within a lower tax band for each year, reducing the marginal tax rate applied to your bonus.
Example of Spreading Bonuses
Imagine you earn £50,000 annually and are expecting a £10,000 bonus.
If the entire bonus is paid in one tax year, £10,000 will push you into the Higher Rate tax band.
By splitting the bonus into £5,000 in one tax year and £5,000 in the next, you may remain within the Basic Rate band, paying 20% tax instead of 40%.
3. Utilize Tax-Free Allowances
The UK tax system offers several allowances and reliefs that can reduce your tax liability. These allowances are particularly beneficial when planning for large one-off payments like bonuses.
Individual Savings Account (ISA) Allowance
You can invest up to £20,000 per tax year (2025 limit) in an ISA, and all returns are completely tax-free.
Consider using your bonus to maximize your ISA contributions, especially if you haven’t yet utilized the full allowance.
Capital Gains Tax (CGT) Allowance
If your bonus income allows you to invest, consider using your CGT allowance for investments that may appreciate in value. The annual CGT exemption for 2025 is £3,000 (lowered from previous years).
4. Charitable Contributions: Give to Save
Donating part of your bonus to charity through the Gift Aid scheme not only benefits a good cause but also reduces your tax bill. Higher and Additional Rate taxpayers can claim tax relief on charitable donations.
How It Works:
For every £1 you donate, charities can claim an additional 25p from HMRC.
If you are a Higher Rate taxpayer (40%), you can claim back 20p for every £1 donated.
For Additional Rate taxpayers (45%), you can claim back 25p per £1.
Example:
You donate £1,000 of your bonus to a registered charity.
The charity claims £250 (Gift Aid), and you reclaim an additional £200 (20%) if you’re a Higher Rate taxpayer.
5. Maximize Pension Tax Relief
Pensions are one of the most tax-efficient ways to save in the UK. In addition to salary sacrifice, you can make personal contributions to your pension and benefit from generous tax relief.
Tax Relief Rates
Basic Rate taxpayers: Receive 20% tax relief on contributions.
Higher Rate taxpayers: Receive 40% tax relief.
Additional Rate taxpayers: Receive 45% tax relief.
Example:
If you’re a Higher Rate taxpayer and contribute £5,000 of your bonus to your pension, HMRC adds £2,000 in tax relief, making your total contribution £7,000.
Annual Allowance
You can contribute up to £60,000 (2025 limit) to your pension annually without incurring additional tax charges. This includes employer contributions, so plan your bonus contributions accordingly.
6. Offset Taxable Income with Allowable Expenses
If you’re self-employed or earn additional income through freelancing, you can offset part of your taxable income (including bonuses) with allowable expenses such as:
Business-related travel and accommodation.
Office supplies and equipment.
Professional memberships and subscriptions.
Using these deductions can reduce your overall tax liability, allowing you to keep more of your bonus.
7. Adjust Student Loan Repayments
If you’re repaying a student loan, your bonus will increase your annual income, potentially triggering higher repayments. While you can’t avoid this, planning ahead can help:
Consider increasing pension contributions to reduce taxable income below the repayment threshold.
For Plan 2 loans, repayments start at £27,295 (2025 limit). Redirecting your bonus to tax-efficient savings can minimize the impact on your repayments.
8. Manage Child Benefit Tax Charges
If your bonus pushes your income above £50,000, you may face the High Income Child Benefit Charge (HICBC). For every £100 above £50,000, 1% of your Child Benefit must be repaid.
Example:
If your income (including bonus) is £55,000 and you receive £1,800 in Child Benefit, you must repay 50% (£900).
How to Reduce HICBC:
Redirect part of your bonus into a pension scheme to bring your taxable income below £50,000.
Alternatively, make charitable contributions or spread your bonus over multiple tax years.
9. Check and Correct Your Tax Code
When you receive a large bonus, HMRC may adjust your tax code to reflect your new income level. However, errors are common, leading to overpayment or underpayment of tax. To avoid this:
Verify your tax code on your payslip after receiving your bonus.
If it’s incorrect, contact HMRC immediately to request an adjustment.
10. Use a Bonus Tax Calculator
To plan effectively, use online bonus tax calculators to estimate how much tax and NICs will be deducted. Tools like those provided by GOV.UK or reputable financial advisory websites can help you anticipate your take-home pay.
Summary of Strategies
Strategy | Tax Savings | Who Benefits Most |
Salary sacrifice | Save on Income Tax and NICs | Basic and Higher Rate taxpayers |
Spreading bonuses | Reduces marginal tax impact | Employees near higher tax thresholds |
Charitable donations | Reduces tax bill through Gift Aid | Higher and Additional Rate taxpayers |
Pension contributions | Significant tax relief on contributions | All taxpayers, especially Higher Rate earners |
ISA and CGT allowances | Tax-free savings and investments | Investors and savers |
Real-Life Examples and Bonus Taxation Scenarios
Understanding bonus taxation in theory is one thing, but seeing how it applies in real-world scenarios is what truly brings the concept to life. In this part, we’ll use relatable examples to illustrate how bonuses are taxed in the UK. By breaking down specific cases, you’ll learn how to navigate the taxation process, calculate deductions, and make informed decisions about how to handle your bonus.
Scenario 1: Bonus Within the Basic Rate Band
Case Study: Emma, a marketing executive
Annual salary: £30,000
Bonus: £3,000 (one-time payment)
Total taxable income: £33,000
Tax Calculation:
Personal Allowance: £12,570 is tax-free.
Basic Rate Tax (20%): £33,000 - £12,570 = £20,430.
Emma’s bonus is fully within the Basic Rate band.
Income Range | Tax Rate | Tax Paid |
Up to £12,570 | 0% | £0 |
£12,571 – £33,000 | 20% | £4,086 |
National Insurance Contributions (NICs):
Threshold: NICs are calculated on income above £12,570.
NIC Rate (12%):
£33,000 - £12,570 = £20,430.
12% of £20,430 = £2,451.60.
Total Deductions on Bonus:
Income Tax: Emma’s £3,000 bonus is taxed at 20% = £600.
NICs: £3,000 x 12% = £360.
Take-Home Bonus: £3,000 - (£600 + £360) = £2,040.
Takeaway: For employees like Emma, whose income falls entirely within the Basic Rate band, bonuses are taxed relatively straightforwardly. She takes home 68% of her bonus after deductions.
Scenario 2: Bonus Pushing Income into the Higher Rate Band
Case Study: James, a software engineer
Annual salary: £48,000
Bonus: £5,000
Total taxable income: £53,000
Tax Calculation:
Personal Allowance: £12,570 is tax-free.
Basic Rate Tax (20%): £50,270 - £12,570 = £37,700.
Higher Rate Tax (40%): £53,000 - £50,270 = £2,730.
Income Range | Tax Rate | Tax Paid |
Up to £12,570 | 0% | £0 |
£12,571 – £50,270 | 20% | £7,540 |
£50,271 – £53,000 | 40% | £1,092 |
National Insurance Contributions:
Threshold: NICs are calculated on income above £12,570.
NICs at 12%: Up to £50,270.
£50,270 - £12,570 = £37,700 x 12% = £4,524.
NICs at 2%: Above £50,270.
£53,000 - £50,270 = £2,730 x 2% = £54.60.
Total Deductions on Bonus:
Income Tax: £1,092.
NICs: £4,524 (12%) + £54.60 (2%) = £4,578.60.
Take-Home Bonus: £5,000 - (£1,092 + £630) = £3,278.40.
Takeaway: James enters the Higher Rate tax band with his bonus, meaning part of it is taxed at 40%. As a result, his overall deductions are higher than for Basic Rate earners.
Scenario 3: Bonus in the Additional Rate Band
Case Study: Sarah, a managing director
Annual salary: £120,000
Bonus: £20,000
Total taxable income: £140,000
Tax Calculation:
Personal Allowance: Reduced to £0.
Personal Allowance tapers by £1 for every £2 earned above £100,000.
£140,000 - £100,000 = £40,000.
£40,000 ÷ 2 = £20,000 (entire allowance is eliminated).
Higher Rate Tax (40%): £125,140 - £50,270 = £74,870.
Additional Rate Tax (45%): £140,000 - £125,140 = £14,860.
Income Range | Tax Rate | Tax Paid |
£12,571 – £50,270 | 20% | £7,540 |
£50,271 – £125,140 | 40% | £29,948 |
£125,141 – £140,000 | 45% | £6,687 |
National Insurance Contributions:
Threshold: NICs are calculated on income above £12,570.
NICs at 12%: Up to £50,270.
£50,270 - £12,570 = £37,700 x 12% = £4,524.
NICs at 2%: Above £50,270.
£140,000 - £50,270 = £89,730 x 2% = £1,794.60.
Total Deductions on Bonus:
Income Tax: £36,635.
NICs: £6,318.60.
Take-Home Bonus: £20,000 - (£36,635 + £1,794.60) = £11,570.40.
Takeaway: For Additional Rate taxpayers like Sarah, significant portions of both salary and bonuses are taxed at 40% or 45%, resulting in a higher effective tax rate on bonuses.
Comparing Scenarios: How Much Do You Take Home?
Income Level | Gross Bonus | Deductions | Take-Home Bonus | Take-Home Percentage |
Basic Rate (£30,000) | £3,000 | £960 | £2,040 | 68% |
Higher Rate (£48,000) | £5,000 | £1,722 | £3,278 | 65.5% |
Additional Rate (£120,000) | £20,000 | £8,429.60 | £11,570 | 57.8% |
Real-Life Applications of Tax Strategies
Using Salary Sacrifice
If Sarah (Additional Rate taxpayer) redirected £10,000 of her £20,000 bonus into her workplace pension, she would:
Avoid £4,500 in Income Tax (45% rate).
Avoid £200 in NICs (2% rate).
Boost her pension pot significantly while reducing her take-home bonus by only £5,300.
Spreading a Bonus
If James (Higher Rate taxpayer) negotiated to split his £5,000 bonus into two £2,500 payments across two tax years, the second payment could stay within the Basic Rate band, saving him £546 in tax.
Key Insights from Examples
Tax Bands Matter: The higher your income, the more significant the tax impact of bonuses, especially when they push you into a higher tax bracket.
Strategies Pay Off: Using tools like salary sacrifice or spreading payments can substantially reduce your tax bill.
Plan Ahead: Work with your employer to align bonuses with your financial goals, whether it’s maximizing pension contributions or minimizing taxes.
Important Considerations for Bonuses and Broader Financial Impacts
In addition to understanding tax rates and strategies for minimizing deductions, it’s essential to consider the broader financial implications of receiving a bonus. Bonuses can affect various aspects of your financial life, from child benefits to student loans and even long-term financial planning. In this section, we’ll delve into these critical areas to help you make the most of your bonus while avoiding unpleasant surprises.
1. Child Benefit and the High-Income Child Benefit Charge (HICBC)
If your income exceeds £50,000, including any bonuses, you may face the High-Income Child Benefit Charge (HICBC). This charge reduces the amount of child benefit you can receive and can even eliminate it entirely if your income reaches a certain level.
How HICBC Works
For every £100 of income over £50,000, you must repay 1% of your Child Benefit.
Once your income reaches £60,000, you lose 100% of your Child Benefit entitlement.
Example:
If you receive £1,800 in Child Benefit annually and your income, including bonuses, is £55,000:
Income above £50,000: £5,000.
5% of £1,800 = £90.
You must repay £90 per month or £1,080 annually.
How to Avoid or Reduce HICBC
Increase Pension Contributions: Redirecting part of your bonus into your pension reduces your taxable income and can help you stay below the £50,000 threshold.
Charitable Donations: Use Gift Aid to lower your adjusted net income.
Opt-Out of Child Benefit: If the charge outweighs the benefit, you can choose not to claim Child Benefit. However, opting out may impact your State Pension credits, so consider this carefully.
2. Student Loan Repayments on Bonuses
Bonuses count toward your annual income threshold for student loan repayments. The repayment thresholds and rates vary depending on the type of loan plan.
Repayment Plans for 2025
Plan Type | Repayment Threshold | Rate Above Threshold |
Plan 1 (pre-2012) | £22,015 | 9% |
Plan 2 (post-2012) | £27,295 | 9% |
Plan 4 (Scotland) | £27,660 | 9% |
Postgraduate Loan | £21,000 | 6% |
Example:
Annual salary: £28,000.
Bonus: £5,000.
Plan 2 threshold: £27,295.
Total income: £33,000.
Income above threshold: £33,000 - £27,295 = £5,705.
Repayment: £5,705 x 9% = £513.45.
How to Reduce Repayments:
Pension Contributions: Lower your taxable income to reduce the amount above the repayment threshold.
Spread Bonuses: If possible, negotiate with your employer to stagger bonuses across tax years.
3. Bonuses and Pension Planning
Contributing part or all of your bonus to a pension can be a highly tax-efficient strategy. In addition to reducing your taxable income, it helps you maximize tax relief and prepare for retirement.
Annual Allowance and Carry Forward
The Annual Allowance for pension contributions in 2025 is £60,000.
If you haven’t used your full allowance in the past three tax years, you can carry forward unused allowances to increase the limit for the current year.
Example:
If you’ve used only £30,000 of your allowance annually for the past three years, you can carry forward £90,000.
Combined with the current year’s allowance, you can contribute up to £150,000 in one year.
Tax Savings on Pension Contributions
Basic Rate taxpayers receive 20% tax relief.
Higher Rate taxpayers receive 40% tax relief.
Additional Rate taxpayers receive 45% tax relief.
Example for Higher Rate Taxpayer:
Bonus: £10,000.
Pension contribution: £10,000.
Tax relief: £4,000 (40%).
Effective cost: £6,000.
Total pension pot: £10,000 (your contribution plus relief).
4. Impact on Mortgage Applications and Loans
If you’re planning to apply for a mortgage or other loan, your bonus can impact how lenders assess your affordability. Lenders may treat bonuses differently depending on their frequency and consistency.
How Lenders View Bonuses
One-Off Bonuses: Often excluded from affordability calculations as they are not guaranteed income.
Consistent Bonuses: If you’ve received bonuses regularly for several years, lenders may include them in their calculations.
Improving Your Borrowing Power
Keep documentation of bonuses from previous years to demonstrate consistency.
If you’re negotiating a new mortgage or loan, consider timing your bonus to align with the application process.
5. Tax on Non-Cash Bonuses
Not all bonuses come in the form of cash. Employers may offer non-cash bonuses such as gift cards, stock options, or perks like gym memberships. These are often subject to different tax rules.
Common Non-Cash Bonuses
Gift Cards:
Taxable if the value exceeds £50 and doesn’t qualify as a trivial benefit.
Stock Options:
May be taxed as capital gains rather than income, offering lower tax rates.
Other Benefits:
Perks like private medical insurance or company cars are treated as benefits in kind (BIKs) and taxed accordingly.
Example:
Your employer provides a gym membership worth £1,000 annually.
This is added to your taxable income and subject to PAYE deductions.
6. Plan for Tax Code Adjustments
After receiving a large bonus, HMRC may adjust your tax code. This adjustment reflects your increased income and ensures you pay the correct amount of tax for the year.
Common Tax Code Scenarios:
Higher Income: If your bonus pushes you into a higher tax band, HMRC may change your tax code to reflect the new rate.
Overpayment or Underpayment: If PAYE deductions on your bonus are incorrect, your tax code will adjust to recover or refund the difference.
How to Manage Tax Code Changes:
Monitor your tax code on your payslips.
Use the GOV.UK Income Tax Checker to verify accuracy.
Contact HMRC if you believe your tax code is incorrect.
7. Bonuses and Tax on Savings Interest
If your bonus significantly increases your income, it could affect the tax treatment of your savings. In the UK, you receive a Personal Savings Allowance based on your tax band:
Tax Band | Personal Savings Allowance |
Basic Rate | £1,000 |
Higher Rate | £500 |
Additional Rate | £0 |
Example:
Without bonus: £45,000 (Higher Rate threshold not breached, savings allowance: £1,000).
With bonus: £51,000 (Higher Rate taxpayer, savings allowance reduced to £500).
Solution: Consider redirecting your bonus into ISAs or pensions to preserve your savings allowance.
8. Tax Refunds and Overpayments
If your bonus is taxed incorrectly (e.g., PAYE overestimates your annual income), you may be eligible for a tax refund. Common reasons for overpayments include:
Emergency tax codes applied to bonuses.
Incorrect deductions during the bonus month.
How to Claim a Refund:
Wait for your P60 or P45 to confirm your total income and tax paid.
Use the HMRC tax refund service to apply for a refund.
Final Thoughts on Bonus Planning
Bonuses can significantly impact your financial position, but with careful planning, you can minimize the tax burden and make the most of your earnings. Understanding how bonuses interact with child benefits, pensions, student loans, and other financial factors allows you to strategize effectively.
When combined with the tips from earlier parts of this guide—such as salary sacrifice and charitable contributions—you’re well-equipped to manage your bonus with confidence. Always consult a tax advisor for tailored advice, particularly for complex situations.
With this comprehensive breakdown, you now have all the tools and knowledge to handle your bonuses like a pro. Cheers to making the most of your rewards!
Summary of the Most Important Points
Bonuses are taxed as part of your total income under the PAYE system, with tax rates of 20%, 40%, or 45% depending on your income bracket.
National Insurance Contributions (NICs) are also applied to bonuses, with rates of 12% for income up to £50,270 and 2% above that threshold.
Salary sacrifice schemes, such as pension contributions, can significantly reduce tax and NIC liability on bonuses.
Spreading bonuses across tax years can help avoid higher tax brackets and reduce overall deductions.
Redirecting bonuses into pensions not only lowers taxable income but also provides tax relief at rates up to 45%.
Bonuses can trigger the High-Income Child Benefit Charge (HICBC) for those earning over £50,000, requiring partial or full repayment of Child Benefit.
Student loan repayments are calculated on total income, including bonuses, and are charged at 9% (Plan 1 and 2) or 6% (postgraduate loans) above the relevant threshold.
Non-cash bonuses like gift cards, stock options, or benefits in kind may also be taxable, depending on their value and type.
Large bonuses can affect your Personal Savings Allowance, reduce eligibility for certain benefits, and may lead to tax code adjustments by HMRC.
Using tax-efficient strategies like charitable donations, ISAs, or claiming refunds for overpaid tax can help maximize your bonus take-home amount.
FAQs
Q1: Are bonuses taxed differently for part-time employees in the UK?
A: No, bonuses are taxed the same way for both part-time and full-time employees, based on the total annual income and applicable tax brackets.
Q2: Do you pay additional tax on bonuses if you have multiple jobs?
A: Yes, bonuses from secondary jobs are taxed at the BR (Basic Rate) code by default, which applies a flat 20% tax without considering your Personal Allowance unless HMRC adjusts your tax code.
Q3: How does receiving a bonus affect your eligibility for Universal Credit?
A: Bonuses count as earned income and can temporarily reduce your Universal Credit payments or disqualify you for that month, depending on the bonus amount and your income threshold.
Q4: Can bonuses be tax-free if paid in the form of company shares?
A: Certain share-based bonuses under schemes like the Share Incentive Plan (SIP) can be tax-free if specific conditions are met, such as holding the shares for a minimum period.
Q5: Is it possible to reclaim overpaid tax on bonuses at the end of the tax year?
A: Yes, if your bonus results in an overpayment of tax due to temporary higher-rate deductions, you can claim a tax refund through HMRC after filing a Self-Assessment or checking your P800 calculation.
Q6: Are holiday bonuses taxed differently from performance-related bonuses?
A: No, holiday bonuses are treated as part of your taxable earnings and are subject to the same PAYE deductions as performance-related bonuses.
Q7: Does a signing bonus impact your tax rate differently than a regular bonus?
A: Signing bonuses are treated as income and taxed under PAYE just like other bonuses, based on your total earnings in the tax year.
Q8: How does a discretionary bonus differ from a contractual bonus in terms of taxation?
A: Both discretionary and contractual bonuses are taxed in the same way; the difference lies in their legal enforceability, not their tax treatment.
Q9: Can employers spread a bonus payment over multiple months to reduce your tax liability?
A: Yes, employers can spread bonus payments across months, but they must still report the total to HMRC, and the tax liability is based on your annual earnings, not monthly income.
Q10: Do expats working in the UK pay tax on bonuses earned locally?
A: Yes, bonuses earned by expats working in the UK are subject to UK Income Tax and National Insurance under PAYE, provided the work was performed in the UK.
Q11: Is there a tax difference between cash bonuses and crypto bonuses in the UK?
A: Yes, while cash bonuses are taxed under PAYE, crypto bonuses are considered “other earnings” and may be subject to both Income Tax and Capital Gains Tax, depending on how they are received or sold.
Q12: Can bonuses trigger an emergency tax code in the UK?
A: Yes, if HMRC does not have accurate income data or if a bonus significantly increases your income, you may temporarily be assigned an emergency tax code until the situation is clarified.
Q13: How does a bonus impact your tax-free savings allowance in a Help to Save account?
A: A bonus will increase your income and may reduce your eligibility for Help to Save or impact the amount you can deposit without penalties if your total income exceeds qualifying thresholds.
Q14: Are bonuses received as part of a redundancy package taxed differently?
A: Yes, bonuses included in redundancy packages are taxed differently; redundancy pay up to £30,000 is tax-free, but any bonuses beyond this amount are subject to PAYE.
Q15: Can you defer a bonus to the next tax year to avoid higher-rate tax?
A: In some cases, employers may allow deferring bonuses, but the tax treatment depends on when the payment is made, and it is taxed in the tax year it is received.
Q16: Do bonuses paid by international employers count as taxable income in the UK?
A: Yes, if you are a UK resident for tax purposes, bonuses from international employers are taxable in the UK, subject to any double taxation agreements in place.
Q17: Can you choose to receive your bonus in non-taxable benefits instead of cash?
A: Yes, some employers may offer the option to receive bonuses as non-taxable benefits like childcare vouchers or additional pension contributions, depending on company policies.
Q18: Do bonuses count toward the income thresholds for tapering the Annual Allowance for pensions?
A: Yes, bonuses are included in your adjusted income, and if your total adjusted income exceeds £260,000 (2024–2025 limit), your Annual Allowance for pension contributions will be reduced.
Q19: Are bonuses taxed differently if you work through an umbrella company?
A: No, bonuses paid through an umbrella company are still subject to PAYE deductions, but umbrella fees and other costs may impact your overall take-home pay.
Q20: Can you avoid National Insurance on your bonus by paying it into a salary sacrifice scheme?
A: Yes, contributing your bonus to a salary sacrifice scheme for pensions or other approved benefits can reduce or eliminate National Insurance Contributions on the amount sacrificed.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, My Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, My Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
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