There’s nothing quite like getting a bonus. You’ve put in the work, and you’re finally getting rewarded beyond your base salary! Then comes the choice of what to do with that money. You could go on holiday, look at a new car, buy yourself something special, put it into a savings account… but then, there’s tax.
Everything you earn is subject to tax in the UK (beyond a point). However, to avoid disappointment, it’s worth knowing how much bonus you’ll receive once HM Revenue and Customs have taken their cut.
How much will my bonus be taxed on top of my salary, you may be asking – and for very good reason! I’m here to help, and I’ve done some digging for you, so keep reading for the complete lowdown.
Do you pay tax on bonuses in the UK?
Yes, bonuses are indeed taxed in the UK – but it’s not as confusing a scenario as you might assume it to be.
UK bonuses are taxed in the exact same way as you’d expect from your normal salary. That means you need to pay income tax and national insurance. If applicable, you may also have to account for further deductions, such as student loan repayments.
Taxation is a way of life, and while you may be promised a specific bonus, it’s worthwhile to ask about the full amount post-tax. As a rule, at the time of writing, income tax starts at a rate of 20%, but scales higher based on your total income. As we all know, this is subject to change, so keep an eye on financial news (and this blog!) if you’re worried.
How much will I get taxed on bonuses?
Simply put, the first £12,570 you earn is tax-free. This is at the time of writing, heading into the tax year 2023/4. Once you earn money beyond this threshold, things start to get a little more expensive!
When earning over £12,570, you start paying 20% tax on anything from there up to £50,270. Then, you start paying 40% tax on anything above that up to £150,000. And, finally, you pay 45% on anything above £150,000.
Essentially, the bonus you receive rolls into your salary, and it’s taxed as one. If you’re self-employed, for example, you’d need to ‘declare’ your bonus in your return by the end of the next January.
These tax brackets have seen something of a shake-up in recent times, most controversially as a result of surprise shake-ups during Liz Truss’ tenure as British Prime Minister, and Kwasi Kwarteng’s time as Chancellor of the Exchequer. However, their proposals to alter the tax brackets further didn’t come to fruition.
As these rates are always due to change, keep a close eye on financial news – the Chancellor typically reveals a new Budget for the UK every spring and autumn, too, which can affect how you’re impacted by tax.
How do I calculate tax on my bonus?
If you are unsure about the exact amount you will be taxed on bonuses, don’t worry about doing the sums yourself! There are plenty of income tax calculators for the UK that are available online. One great starting point is the handy (and free) tax calculator provided by the taxman! Check out the income tax estimator on the gov.uk site.
Are there ways I can avoid paying taxes on my bonuses?
First of all, let’s get one thing straight – tax evasion is never a good idea – and we would never recommend it! However, there are legal ways of lowering the taxes you pay on your bonuses. This can be particularly beneficial for mid to high earners who see much of their bonuses lost to HMRC.
One method, which is completely unique to bonus payments, will allow you to access your extra cash at a later date – the key is to use a bonus sacrifice.
What is a bonus sacrifice?
Instead of accepting your bonus immediately and receiving whatever money you have left over after tax, you simply pay your bonus into your pension. Thus, you’re temporarily ‘sacrificing’ your bonus, albeit not altogether.
The money will, of course, remain yours, but you won’t be able to access it before you are at an age where you can receive your pension.
However, you also won’t have to pay any income tax, deductions specific to you, or national insurance contributions on the bonus you’re due. All you need to do is ask your employer or bonus provider to pay it directly into your pension, instead of as part of your regular wage slip.
Moreover, your employer will also save money on their employer’s national insurance contributions through bonus sacrifices. In some cases, they may pay this saving into your pension on top of your bonus – which means you not only benefit from a tax-free bonus, but also an additional lump sum.
That being said, it is worth remembering that while this is a great solution to bonus taxation, it isn’t foolproof. You can only pay £40,000 (or your whole salary if it is lower) per year into a pension, completely tax-free.
Of course, if you haven’t reached this limit in the past three years, you can use those unused allowances to boost this year’s – this is known as a ‘pension carry forward’.
If you’re lucky enough to be a particularly high earner, remember too that you’re only allowed to pay up to £1,073,100 in your pension lifetime allowance completely tax-free. Anything more than that will be taxed, and you will have to pay a charge.
It’s always a good idea to check taxation rules on any payments or transfers you wish to make. You never know how much money you might save! Be sure to check which type of pension plan works for you – SIPP or SSAS.
If you’ve already been doing this at a number of different companies, you may end up with multiple pensions, which can be a headache in itself to manage! There are some apps that help you find and combine pensions from previous employers to help simplify your finances.
Is a bonus sacrifice worth it?
A bonus sacrifice is a great way of adding to your pension while also taking full advantage of the bonus that you have earned.
However, as nice of an idea as it is to relieve yourself of paying tax immediately on money you’re entitled to, it’s also important not to shoot yourself in the foot. You won’t get access to your pension until you can legally retire. If you’re locking your bonus away at 26 years old, you will have more than 40 years until you can see it again (and state pension ages will only increase further in the years to come).
It’s also worth considering upcoming expenses. While you may be able to go without the bonus for now, are there any upcoming payments that could use some help? If you’re in the middle of paying off debt, or want to invest in property, for example, you may benefit from merely taking your bonus and putting it to good use immediately.
Once you’ve made your decision, all you need to do is inform your employer, and they should deal with all the rest!
Before You Go…
Income taxes are something that most people hate to pay. The worst is getting stuck on emergency tax. I personally dislike the whole process of filing taxes as well! There are however many legal ways to help minimize your taxes. We talked about bonus sacrifices here.
Another option to consider is whether you should take a company car or a car allowance. There are benefits and drawbacks to both methods and they can also potentially have an impact on your taxes!
What is the most tax-efficient way to receive bonuses in the UK?
You can ‘sacrifice’ your bonus by arranging for it to be paid into your pension. You will not be able to access that money until you are of retirement age, but the money will be free from taxation at source.
Are bonuses and salary taxed differently?
No. In the UK, you’ll pay tax and any further applicable deductions in one lump sum. If you have an employer, they may choose to pay your salary and bonus together in a single month’s wage. Therefore, deductions will apply at source.
If you are self-employed or run a limited company of your own, you’ll need to declare any external payments not for services or goods delivered in your tax return. For example, if you work as a contractor, you may receive a bonus cash-in-hand from a client. In which case, you’ll need to detail this when you file before late January.
Why do you pay more tax on a bonus in the UK?
Technically speaking, the tax rate you pay on your bonus in the UK is the exact same rate that you pay on your income. The only overall difference is that, since you earned more during the year, you may have to pay a higher tax rate overall. Your bonus adds to your income, or salary, and HM Revenue and Customs will apply a general rate to the final total.
How can I use my bonus in the UK?
Aside from making a bonus sacrifice, you can simply have your bonus paid directly into your current account, along with your standard salary. You can then choose to spend, save or invest your bonus however you wish.
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.