UK bonuses are taxed like your normal salary. This means that you will pay income tax and national insurance on a bonus. If you're making student loan repayments, your bonus will also be affected by these. So if you've ever wondered why your bonus doesn't feel as big you would expect, it's because it's taxed quite high.
In this article, we’ll explore the UK tax rules on bonuses, and what you can do to keep more of your bonus money instead of losing it to tax.
How much tax will I pay on my bonus?
You could pay between 20% and 45% tax on your bonus, plus national insurance. 100% of your bonus is effectively subject to income tax. This is because your bonus is added to your existing salary. It's like a one-off pay rise.
Do I pay national insurance on my bonus?
Yes, you will pay national insurance on your bonus. This will be 10% if you're a basic rate tax payer, and 2% if you're a higher rate tax payer.
Let’s take Aaron as an example:
His standard salary is £35,000 per year. This means he’s a basic rate tax payer in the 2023/24 tax year; he pays 20% tax on his earnings over £12,570 and 10% national insurance on his earnings over £12,570.
Aaron has performed well and is told he’ll get a bonus of £5,000. This takes his salary for that particular year up to £40,000.
He is still classed as a basic rate tax payer, so that £5,000 bonus will be taxed at 20% income tax and 10% national insurance contributions.
Aaron’s £5,000 is effectively reduced to £3,500.00 with deductions of £1000 in income tax and £500 in NI contributions.
So the tax on my bonus is the same as my normal salary?
For many employees, yes. Bonuses count as income. So you could be in a situation where your bonus pushes your income into a higher tax rate bracket.
Let’s take Hannah as an example:
Hannah earns £48,000 per year.
After a strong performance, she gets a gross (before tax) bonus of £7000.
Her standard salary makes her a basic rate tax payer, like Aaron.
However, her bonus earnings give her total earnings in that particular year of £55,000. This means she’s now classed as a higher rate tax payer.
Any earnings over £50,270 fall into the higher rate tax bracket.
So for Hannah, some of her bonus – the amount between £48,000 and £50,270 - will be taxed at the basic rate. And the remainder of the bonus – the amount between £50,270 and £55,000 - will be taxed at the higher rate.
Let’s break down the sums:
· £2270 taxed at 20% income tax and 10% NI contributions
· £4730 taxed at 40% income tax and 2% NI contributions
So Hannah will lose £2780.49 to the government, meaning her net (take-home) bonus will be £4332.40
Quite a difference from the original £7000.
The key to working out what bonus you’ll actually take home is to know your tax brackets.
Check out the government website for the current income tax rates.
As you can see, tax on bonuses can be pretty brutal if you’re a high earner.
Other things like child benefits and student loan repayments can also potentially affect or be affected by your bonus.
Bonus Tax Tables Examples
Bonus | Basic Rate Tax and National Insurance | Higher Rate Tax and National Insurance |
£1000 | £300 | £420 |
£2000 | £600 | £840 |
£3000 | £900 | £1260 |
£4000 | £1200 | £1680 |
£5000 | £1500 | £2100 |
£6000 | £1800 | £2520 |
£7000 | £2100 | £2940 |
£8000 | £2400 | £3360 |
£9000 | £2880 | £3780 |
£10000 | £2700 | £4200 |
£15000 | £4500 | £6300 |
£20000 | £6000 | £8400 |
Can I get a tax-free bonus?
There is actually a very simple way of avoiding tax on a bonus. It’s called Bonus Sacrifice.
It means you sacrifice your bonus by putting it straight into your pension. So you pay no tax or national insurance contributions on the bonus.
In other words, Aaron and Hannah could put their entire bonuses straight into their pension without losing any of it to tax.
On top of keeping the entire bonus, the employee’s company will be making savings on employer national insurance contributions. And these savings are often passed onto the employee. So a bonus could actually be worth more if placed into a pension.
Remember that when you start withdrawing money from your pension at retirement, you could pay tax on it.
This sounds too easy for a tax-free bonus. Is there a catch?
Pensions are very tax efficient because the government wants to encourage people to save for their retirement. Workplace pensions effectively give you free money.
The drawback is that you’re locking away that bonus until 55, at the earliest. And with the state pension age increasing, it’s more likely to be 57 or 58 if your retirement is a long way off.
Sacrificing your bonus may not be practical if your regular income relies on bonuses.
Putting part of your income into a pension may potentially impact how much you can borrow for a mortgage, or any type of loan that’s assessed on gross (before tax) earnings.
So don’t rush into a bonus sacrifice. Think about your personal circumstances before trying to avoid tax on your bonus.
A flexible approach could be an option. For example, put 50% of your bonus into your pension and keep 50% in your pay check, meaning only 50% is subject to tax. Decide the split between pension and pay however you like.
There are also limits on how much you can pay into your pension.
You get an annual pension contributions allowance of £60,000 or the equivalent of your annual salary; whichever is the lower – you can roll this over for up to 3 years if you’ve got any unused allowances.
So for a high earner getting regular bonuses, these allowance are something to bear in mind. But for one off bonuses now and then, you’ll probably stay within the allowances if you use bonus sacrifice.
How do I make a bonus sacrifice in practice?
Bonus sacrifice is a pretty simple process:
· Your employer lets you know when you’re getting your bonus
· Work out how much of your bonus to sacrifice into your pension
· Tell your employer how much of your bonus you wish to sacrifice into a pension
· Your employer pays some or all of your bonus into your pension scheme
· The tax relief is applied automatically if you're in a salary sacrifice scheme or net pay scheme. You don’t need to do anything else. If you're a higher rate or additional rate tax payer in a relief at source scheme, you will need to claim back some of the tax relief from HMRC
What about a lump sum redundancy payment?
Tax on a redundancy lump sum works differently to a bonus. The first £30,000 of a redundancy payment can be paid to you tax-free. Anything over this amount will be added to your other income for the tax year, and taxed as per income tax rules.
Key takeaway
Think of a bonus as an extension of your regular salary. You’ll pay income tax and national insurance contributions on it in exactly the same way.
A simple way of getting a tax-free bonus is to pay it directly into your pension.
Remember, finance is personal. So always think about your individual circumstances when deciding what’s best for your income.
You may find it useful to speak to a tax adviser or financial adviser such as myself.
