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Quick Summary
Bonuses, just like your normal monthly/ annual salary, are subject to taxes in the UK.
You’ll still have to pay income tax and national insurance on it, so unfortunately you won’t get the full bonus amount upfront. However, there are a few ways to (legally) avoid paying tax, which we’ll cover below.
If your employer has recently confirmed you’ll be getting a bonus, surely that’s good news, right? You’ve worked hard all year, put in the hours, and now you’re getting rewarded financially for that effort.
However, you might already be aware that you won’t receive the full sum your employee says you’re getting. Why? Because your bonus is still subject to tax.
It might seem unfair to have a percentage of your hard-earned bonus shaved away into taxes immediately upon receipt of it, but that’s just what happens.
In this article, we’ll delve into how bonuses are taxed in the UK, plus a few ways you can legally avoid paying tax on your bonus. (Spoiler: Unfortunately, you’ll never legally be able to avoid tax altogether on your bonus and receive the sum immediately.)
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Income Tax
In the UK, the tax system is progressive. This means the tax rate increases as the taxable amount increases.
The same applies to bonuses. The tax you pay on your bonus will depend on which tax bracket your total taxable income, including the bonus, falls into.
For the tax year 2023/2024, the income tax rates are as follows:
- Personal Allowance: This is the amount of income you’re not required to pay tax on. For 2023/2024, the Personal Allowance is £12,570.
- Basic rate: This applies to your income over the Personal Allowance up to £50,270, at a rate of 20%.
- Higher rate: If your income is between £50,271 and £150,000, you pay a 40% tax rate.
- Additional rate: If your income exceeds £150,000, you pay a 45% tax rate.
It’s important to be aware that your bonus could potentially push you into a higher earnings bracket, resulting in a larger percentage of your bonus being taxed.
How much will I be taxed on my bonus?
How much you’ll be taxed on your bonus depends on two things:
- How much you earn each year (i.e. what rate you’re currently taxed on)
- How much is the bonus (i.e. whether your bonus pushes you into the higher rate)
If you currently earn £50,000 annually, for example, and are receiving a bonus that pushes you into the higher tax bracket, then your bonus will be subject to that higher tax rate.
National Insurance
In addition to income tax, National Insurance (NI) contributions are also deducted from your bonus.
These contributions go towards state benefits and services, including the National Health Service (NHS).
Just like income tax, NI contributions are deducted at different rates depending on how much you earn.
For the tax year 2023/2024, the NI rates are:
| Income range | National insurance rate |
| Up to £12,570 | 0% |
| £12,571 to £50,270 | 12% |
| £50,271 to £150,000 | 2% |
| Over £150,000 | 2% |
Examples
- £45,000/year and £10,000 bonus:
If you are earning £45,000 per year and you get a £10,000 bonus, then £4,730 (the amount that is in the higher tax bracket), will be taxed at 40%. The remaining £5,270 will be taxed at 20%.
- £35,000/year and £5,000 bonus:
Someone earning £35,000 per year is on a basic rate tax, paying 20% on their earnings over £12,570 and 12% national insurance on earnings over that personal allowance. With a £5,000 bonus, their salary rises to £40,000 – which is still within the basic tax rate.
The £5,000 bonus would therefore be to £3,337.50 with deductions of £1000 in income tax and £662.50 in NI contributions.
- £100,000/year and £10,000 bonus
Someone lucky enough to be earning £100,00 is classed as a higher-rate taxpayer, meaning they are taxed at 40%. Their bonus would therefore also be taxed at 40%, which is £4,000. Then, the bonus would also be subject to national insurance contributions of 2% (£200).
Finally, every £2 made over £100,000 means you lose £1 of your personal allowance. So, at £110,000, that’s a £5,000 reduction in their personal allowance – meaning they would also be subject to 40% income tax on that £5,000.
In total, someone in this position would be taxed over 60%, deducting £6,200 of their £10,000 bonus for a total of £3,800. Pretty dire.
Other Deductions You Might Be Subject To
Beyond income tax and National Insurance, other deductions might come out of your bonus.
Student Loans
If you’re repaying a student loan, repayments will also be taken from your bonus.
The exact amount depends on the type of plan you’re on:
- Plan 1: If you’re an English or Welsh student who started an undergraduate course before September 2012, or a Scottish or Northern Irish student who started an undergraduate or postgraduate course, you repay 9% of your income over £19,895.
- Plan 2: If you’re an English or Welsh student who started an undergraduate course after September 2012, you repay 9% of your income over £27,295.
- Postgraduate Loan: If you’re repaying a Postgraduate Loan, you repay 6% of your income over £21,000.
Child Benefit
If you or your partner receive Child Benefit and you earn over £50,000, you may need to pay the High Income Child Benefit charge.
This can take a portion out of your bonus, as it is based on the highest earner’s income. The charge is 1% of your Child Benefit payment for every £100 of income over £50,000. If you (or your partner) earn over £60,000 you are not eligible for Child Benefit
How To Avoid Paying Taxes on My Bonus
While you can’t avoid paying taxes on a bonus entirely (as this would be tax evasion and is illegal), there are a few strategies you can employ to potentially reduce the amount
of tax you need to pay.
Pension Contributions
You could choose to redirect a portion or all of your bonus into your pension fund, which is known as a bonus sacrifice.
Contributions made into a pension scheme are tax-free up to certain limits, so you won’t have to pay any income tax or National Insurance Contributions or other additional deductions on your bonus.
The caveat, of course, is that you then won’t be able to access your bonus until you’re of retirement age (55, rising to 57 in 2028).
For some people, this might not be a huge problem – but if you had plans for your bonus, you’ll obviously want to avoid locking it away.
To sacrifice your bonus, simply tell your employer that you want it paid into your pension instead and they’ll be able to organise this for you.
Note: You can only pay £60,000 or 100% of your salary, whichever is lower, into your pension tax-free per year. If you haven’t hit this limit in the past 3 years, you can use your unused allowance from the past 3 years, too – known as ‘pension carry forward’. Check your P60 to see how much you’ve contributed.
Is a bonus sacrifice a good idea?
Sacrificing your bonus to put it in your pension can be a seriously sensible idea for high earners (£100,000 – £125,000), who can be subject to 60% tax on their bonuses.
Even for anyone earning lower than that, it can still be worth considering if you want to avoid being taxed on your bonus.
The downside, of course, is that you can’t make use of that extra cash now, so it’s worth weighing up your options carefully.
Many workplaces will let you designate a certain portion of your bonus to be sacrificed to into your pension so you can still enjoy some of it now, while making some wise savings on tax.
For example, if you are on a £45,000 salary paid half of your £10,000 bonus into your pension, you would only lose £1,600 in tax — leaving you with £3,400 to enjoy now.
Will my bonus be taxed higher than my salary?
In the UK, bonus payments are subject to the same taxation rates as regular income. This means they are not taxed at a higher rate but are instead included in your total income for the year and taxed accordingly.