How Bonuses Are Taxed in the UK

Published on October 20, 2023

BonusesIncome Tax

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Why Are You Worried About Tax on Bonuses?

Earning a bonus is a great reward for your hard work, but the tax implications can be concerning. Let's break down how bonuses are taxed in the UK.

Understanding Bonus Taxation

Bonuses are considered earnings and are subject to the same tax rates as your regular salary, which includes income tax and National Insurance Contributions (NIC). Additional deductions like student loan payments may also apply.

How Are Bonuses Taxed?

Your employer handles bonus taxation as part of your regular paycheck. If you are employed, you don't need to worry about managing this process.

Can You Avoid Tax on Your Bonus?

Yes, there is a legal way to reduce tax on your bonus, and we'll explain it later. First, let's see how much you might be paying in taxes.

Income Tax on Bonuses

In the UK, income tax is based on different tax bands. Below, you'll find the income tax rates for England, Wales, and Northern Ireland:

Tax bandIncome rangeTax rate
Personal allowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateOver £125,14045%

In Scotland, the rates are slightly different:

Tax bandIncome rangeTax rate
Personal allowanceUp to £12,5700%
Starter rate£12,571 to £14,73219%
Basic rate£14,733 to £25,68820%
Intermediate rate£25,689 to £43,66221%
Higher rate£43,663 to £125,14042%
Top rateOver £125,14047%

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.

Higher Earners and the 60% Tax Trap

If you earn between £100,000 and £125,000 per year, you may encounter a hidden tax called the 60% tax trap. Your personal allowance is reduced by £1 for every £2 you earn over £100,000, resulting in effectively paying 60% tax during this income range.

National Insurance Contributions (NIC)

National insurance contributions for your bonus are straightforward. You pay a percentage based on your bonus amount, depending on which income range your bonus falls into.

Income rangeNational insurance rate
Up to £12,5700%
£12,571 to £50,27012%
£50,271 to £150,0002%
Over £150,0002%

Additional Deductions

If you have a student loan, you'll need to make repayments from your bonus, just as you would from your regular salary. Pension contributions are not automatically deducted from your bonus, but it depends on your employer's contribution policy.

Solution: Reducing Tax with Bonus Sacrifice

To lower the tax burden on your bonus, you can use a strategy called "bonus sacrifice." This method involves redirecting your bonus into your pension through your employer. By doing this, you can avoid paying income tax, NIC, and other deductions.

How Bonus Sacrifice Works

When you opt for bonus sacrifice, you won't receive your bonus in cash right away. Instead, it goes into your pension fund. This strategy offers tax benefits, and your employer may also contribute to your pension, helping you save more for retirement.

Limitations of Bonus Sacrifice

There are some limits to consider. You can contribute up to £60,000 or 100% of your salary (whichever is lower) into your pension tax-free each year. If you haven't used your pension allowance in previous years, you can carry forward unused allowances.

Your Choice

Taxation can be complex. You have the choice to receive your bonus as cash or contribute it to your pension through bonus sacrifice. This choice is particularly beneficial for higher earners who may face substantial tax rates on their bonuses. If you have questions, consider discussing with your employer, as they have experience in handling these matters.

Consider setting up a personal pension to secure your financial future. For easy-to-use and low-fee options, check out PensionBee¹. They have a strong track record of growing pensions and can help you plan for a comfortable retirement.

Sources

How are bonuses Taxed UK

How are bonuses taxed in the UK & can you avoid it?

Expenses and benefits: bonuses: Overview

Bonus sacrifice – how to save tax

How are bonuses taxed in the UK? (2023/24)

Are UK bonuses taxed?