How are bonuses taxed in the UK? The taxation of bonuses is identical to that of your regular wage. Therefore, you would have to pay income tax, social security, and any additional deductions, like student loan interest, on it. But by fully understanding how to use pension contributions to pay less tax, you can make sure you’re not missing any tricks.
| Are bonuses taxed in the UK? | Yes, bonuses are subject to taxation in the UK, according to the tax rate of the earner’s tax bracket. |
| How are bonuses taxed in the UK? | Bonuses are treated like ordinary income and are taxed according to the same tax bracket percentage. |
| What is a bonus sacrifice? | Bonus sacrifice is when you decide to pay a portion, or all, of your bonus into your pension plan in order to receive tax relief on the bonus sum. |
Do you pay tax on bonuses in the UK?
Yes, in the UK, as an employee, if you receive a cash bonus from your employer, you are normally obliged to pay income tax on the amount awarded, though it is possible to avoid paying taxes on this. To find out more, please read on.
How are bonuses taxed in the UK in 2024?
If you’re eligible for a bonus, you’re probably wondering how much tax you will pay on your bonus in the UK. Bonuses are part of your income and as such they are taxed according to your income bracket, at the same rate as you pay on your regular income earnings. The same applies to NI payments.
How do you calculate tax on a bonus?
How are bonuses taxed in the UK and how can you work it out? Calculating the exact taxes you owe can be tricky, but we can provide you with an example to make it easier to understand.
Say that you make £50,000 a year, putting you in the high end of the basic income tax bracket. Now let’s say that you received an annual bonus of £1,000. It means your total annual income (including bonus) will be £51,000, £730 over the basic income tax bracket. So, you’ll pay 20% income tax on £37,300 (the taxable amount you were paid up to £50,270), and 40% income tax on £730 (the amount you were paid that fell into the higher rate tax bracket).
In terms of NI, you pay 8% on the basic rate amount and 2% on the higher rate amount.
Non-cash bonuses, such as the provision on company cars or private health insurance, get taxed through the benefit-in-kind system. This utilises different rules that employers have to follow for each specific item. When an employee is awarded a non-cash bonus that can be easily converted into cash, employers should follow the same rules as those that apply to cash bonuses, reporting and paying any tax through the PAYE system.
How can I avoid paying tax on my bonus UK?
How are bonuses taxed in the UK under the salary sacrifice scheme? It’s a good question and the answer reveals that it’s one of the best ways to avoid paying income tax on bonuses when you invest them in your pension via “bonus sacrifice”. The downsides to using salary or bonus sacrifice are that you don’t receive the money there and then, and you cannot access it until you reach 55 years of age (changing to 57 in 2028).
Avoiding paying tax on bonuses in the UK by going down the salary sacrifice route, is discussed in more detail a little later on.
Employer tax obligations on bonuses in the UK
How are bonuses taxed in the UK from the employer’s point of view? When employers pay bonuses to their employees, they must follow UK tax rules. As explained earlier, bonus payments form part of an employee’s income and are therefore susceptible to both income tax and National Insurance.
Employers pay employer’s NICs on the bonus, and when using HR and payroll software to calculate corporation tax, employers add the bonus amount to payroll expenses, so it is deducted from revenue as a business expense.
As regards tax on bonus payments in the UK, all employers are bound by law to notify HMRC of all bonus payments made.
The amount of income tax due depends on which income tax bracket the employee falls into, but it also needs to be borne in mind that bonus payments can push an employee’s total annual income into a higher tax bracket.
Tax-free allowances in the UK and their relevance to bonuses
Tax allowances constitute the amount of tax you are able to deduct in the form of standard deductions, itemised deductions, and personal exemptions prior to calculating your total taxable income. Several factors can alter these allowances, and what is applicable to you depends on your personal situation.
Tax allowances are still taken into account when considering your total income in any given tax year – income which also includes any bonuses paid during that same year.
How are bonuses taxed in the UK via salary sacrifice?
It’s very easy to calculate your bonus after tax in the UK if it is paid via salary or bonus sacrifice, because it doesn’t get taxed at all. Whether you make a full or partial sacrifice, the money you contribute to your pension plan is both income tax and NI contribution free. Yes, the whole amount, (providing it doesn’t take you above your £60,000 per annum pension contributions tax free limit) goes totally untaxed into your pension pot.
In the long run, you pay less tax on your bonus the more of it you forfeit in the present. Additionally, your former meagre bonus has been reborn as a wise investment for when you are ‘state-pension-age’. It makes sense to receive as much of the benefit as you can, even if your job isn’t among those with the best pensions. To start making use of your bonus sacrifice, simply tell your employer that you prefer to have the money deposited into your pension and they should take care of the rest.
Apart from not receiving bonus cash at the time it’s paid, and having to wait until you’re at least 55 years old (changing to 57 in 2028), the other downside is that after taking 25% of your pension pot tax-free, the balance will be taxable. But there is another way.
If you don’t want to postpone accessing the money until you are pension-age, and you want to avoid paying income tax, you may want to consider investing your net earnings into an ISA, like a Stocks and Shares ISA, since this will allow you to invest the money in an investment portfolio that is tax efficient, according to your investment profile, as long as you don’t go over your personal allowance. As long as you stick within your personal annual ISA allowance of £20,000, your stocks and shares ISA contributions will be completely tax-free.
How are bonuses taxed in the UK? Is the rate higher than tax on salary?
If you want to calculate the tax on bonuses in the UK, you do so in the same way as if you were calculating tax on your salary. The rate at which you pay income tax remains the same (as does your NI payments), unless the bonus amount tips you into the next income tax bracket.
Can I give my employee a tax free bonus?
The only way for employers to award their employees a tax-free cash bonus is to pay the bonus into their pension schemes. In order to be able to do so, the employee must first agree to the bonus sacrifice.
What is the bonus tax rate for 2024?
The tax rate that you will pay on your bonus will depend on the income bracket that you fall into in the 2024/2025 tax year:
- Basic rate: for earners making between £12,571 to £50,270, your bonus will be taxed at 20%.
Higher rate: for those making between £50,271 to £150,000, your bonus is taxed at 40%. - Additional rate: for earners making over £150,000, your bonus is taxed 45%
As for the NI contributions that you pay on your bonus, they will amount to 8% for earners in the basic rate bracket, and 2% for earners in the other two brackets.
Frequently Asked Questions
Will I get a tax refund on my bonus?
Unfortunately, there aren’t many circumstances in which you are eligible for a tax refund for bonuses you’ve already received.
How are bonuses taxed in the UK?
In the UK, bonuses are taxed at the same rate as your normal income, so the rate at which your bonus will be taxed will depend on your income bracket.
When does it make sense to use the bonus sacrifice?
Using the bonus sacrifice is a more fiscally efficient way of receiving bonus payments. For those who don’t need access to the additional funds of the bonus in the short term, requesting the bonus sacrifice makes more sense financially.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
