How Much Is the Tax On Bonuses?
- MAZ
- 2 days ago
- 16 min read
Index:
The Audio Summary of the Key Points of the Article:
Understanding the Basics of Bonus Taxation in the UK
So, you’ve just landed a juicy bonus from work, and you’re wondering how much of it you’ll actually get to keep? In the UK, bonuses are taxed as part of your income, just like your regular salary, but the way it’s handled can feel like a bit of a maze. For the 2025/26 tax year, which runs from 6 April 2025 to 5 April 2026, your bonus will be subject to Income Tax and National Insurance Contributions (NICs), and the exact amount depends on your overall income, tax code, and a few other factors. Let’s break it down step-by-step, starting with the basics, so you can get a clear picture of what’s coming out of that hard-earned bonus.
How Bonuses Fit Into Your Income Tax
Right, let’s get straight to it: your bonus isn’t taxed at a special “bonus rate” like you might hear about in some other countries. Instead, it’s lumped in with your regular salary and taxed according to your Income Tax band. For the 2025/26 tax year, the UK’s Income Tax bands for England, Wales, and Northern Ireland are as follows:
Income Band | Taxable Income Range | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 - £50,270 | 20% |
Higher Rate | £50,271 - £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Income Tax Rates for 2025/26 in the UK
Now, here’s the kicker: if your bonus pushes your total income into a higher tax band, you’ll pay more tax on the portion that crosses the threshold. For example, if you earn £45,000 a year and get a £10,000 bonus, the first £5,270 of that bonus stays in the Basic Rate band (20%), but the remaining £4,730 gets taxed at the Higher Rate (40%). This is why your bonus might feel like it’s taken a bigger hit than expected.
UK Bonus Tax Calculator
National Insurance Contributions on Bonuses
Don’t relax just yet—there’s also National Insurance to consider. For employees, you’ll pay Class 1 National Insurance on your bonus at the following rates for 2025/26:
Earnings Range | NIC Rate |
Up to £242 per week (£12,584 per year) | 0% |
£242.01 - £967 per week (£12,584.01 - £50,284 per year) | 8% |
Over £967 per week (£50,284 per year) | 2% |
So, if your bonus pushes your annual earnings over £50,284, you’ll only pay 2% NICs on the amount above that, which is a bit of a relief compared to the 8% on lower earnings. But here’s where it gets tricky: your employer also pays Class 1 Secondary NICs at 15% on any earnings above £96 per week (£4,992 per year). This doesn’t come out of your pocket, but it’s something business owners need to factor into their payroll costs.
Why Your Bonus Might Feel Over-Taxed
Ever looked at your payslip after a bonus and thought, “Where did all my money go?” This often happens because of how PAYE (Pay As You Earn) works. Your employer calculates tax based on your total income for the pay period, which can make it seem like your bonus is taxed at a higher rate than your salary. For instance, if you get a £5,000 bonus in one month, your employer might assume you’re earning that much every month, pushing you into a higher tax band temporarily. This is called emergency tax, and it’s more common than you’d think.
Here’s a quick example to make it real:
Case Study: Aled’s Bonus Surprise
Aled, a marketing manager from Cardiff, earns £40,000 a year (£3,333 monthly). In June 2025, he gets a £6,000 bonus. His employer processes it through PAYE, and for that month, his income looks like £9,333 (£3,333 + £6,000). The payroll system assumes he’s earning £112,000 annually, so it taxes part of his bonus at 40%, even though his actual annual income is only £46,000. Aled ends up with less than he expected, but he can claim a refund if overtaxed by contacting HMRC or waiting until the end of the tax year when his tax code adjusts.
To avoid this, check your tax code (it’s on your payslip or P45) and ensure it reflects your true annual income. If it’s wrong, contact HMRC pronto at GOV.UK’s helpline to get it sorted.
The 60% Tax Trap
Now, here’s something they don’t shout about at the HMRC office: the 60% tax trap. If your total income (salary plus bonus) falls between £100,000 and £125,140, your Personal Allowance (£12,570) starts to shrink. For every £2 you earn over £100,000, you lose £1 of your Personal Allowance. Once you hit £125,140, it’s gone entirely. This effectively adds a 20% tax hit on top of the 40% Higher Rate, making it feel like you’re paying 60% tax on that portion of your income.
Let’s break it down with a quick table to show how it works for someone earning £110,000 with a £10,000 bonus:
Income Component | Amount | Tax Rate | Tax Paid |
First £12,570 (Personal Allowance) | £12,570 | 0% | £0 |
£12,571 - £50,270 (Basic Rate) | £37,700 | 20% | £7,540 |
£50,271 - £100,000 (Higher Rate) | £49,730 | 40% | £19,892 |
£100,001 - £110,000 (Higher Rate + Reduced Allowance) | £10,000 | ~60% | £6,000 |
£10,000 Bonus (Higher Rate) | £10,000 | 40% | £4,000 |
Total Tax | £37,432 |
Note: The ~60% rate includes the 40% tax plus the 20% effective tax from losing the Personal Allowance.
This trap catches a lot of high earners off guard, especially when a bonus pushes them into this range. If you’re close to £100,000, it’s worth doing some quick maths before celebrating that bonus.
Tax Paid on Income Components
Student Loans and Other Deductions
Got a student loan? Your bonus could take another hit. If you’re repaying a Plan 2 student loan (for those who started university after September 2012), you’ll pay 9% on any income above £27,295 in 2025/26. So, a £10,000 bonus could mean an extra £900 deduction if it’s all above that threshold. Other deductions, like pension contributions or childcare schemes, might also reduce your take-home pay, but they can lower your taxable income, which is a silver lining.
The Summary: Income Tax and NICs on Bonuses 2025/26
Income Tax Bands
Personal Allowance: £0 - £12,570 at 0%
Basic Rate: £12,571 - £50,270 at 20%
Higher Rate: £50,271 - £125,140 at 40%
Additional Rate: Over £125,140 at 45%
National Insurance Rates (Class 1)
Up to £242/week (£12,584/year): 0%
£242.01 - £967/week (£12,584.01 - £50,284/year): 8%
Over £967/week (£50,284/year): 2%
Example Calculation
For an employee earning £40,000 annually with a £6,000 bonus:
Income Tax: £6,000 taxed at 20% = £1,200 (assuming total income stays in Basic Rate)
NICs: £6,000 at 8% = £480
Total Deductions: £1,200 + £480 = £1,680
Net Bonus: £6,000 - £1,680 = £4,320
Strategies to Minimise Your Bonus Tax and Avoid Common Pitfalls
Now, nobody likes seeing their bonus whittled down by taxes, so let’s talk about some clever ways to keep more of that cash in your pocket. While you can’t escape Income Tax and National Insurance entirely, there are legal and practical strategies to reduce your tax liability on bonuses in the UK. Plus, there are some traps to watch out for, especially if you’re a business owner or a high earner. This section dives into actionable tips, real-world examples, and a few lesser-known quirks of the tax system, all tailored for the 2025/26 tax year.
Pension Contributions: A Tax-Saving Superpower
Let’s start with a game-changer: pension contributions. Paying into your pension directly from your bonus can lower your taxable income, which means less tax and National Insurance Contributions (NICs) to worry about. In the UK, you get tax relief on pension contributions up to £60,000 per year (or 100% of your earnings, whichever is lower) for the 2025/26 tax year, as confirmed by HMRC’s pension tax relief guidance.
Here’s how it works: if you earn £60,000 and get a £10,000 bonus, putting £5,000 of that bonus into your pension reduces your taxable income to £65,000. If you’re a Higher Rate taxpayer (40%), you’d save £2,000 in Income Tax and £400 in NICs (8% on £5,000). Plus, your employer might add to your pension pot, sweetening the deal. Just make sure your pension provider processes it as a “relief at source” or “net pay” arrangement—check with them to avoid surprises.
Case Study: Sioned’s Pension PlaySioned, a software developer from Swansea, earns £55,000 annually. In July 2025, she gets a £15,000 bonus, pushing her into the Higher Rate tax band. Worried about losing 40% of her bonus, she puts £10,000 into her workplace pension. This drops her taxable income to £60,000, keeping her just within the Basic Rate band for part of her income. She saves £4,000 in tax and £800 in NICs, and her pension grows for retirement. Sioned’s chuffed—she’s saved thousands and secured her future.
Timing Your Bonus for Tax Efficiency
Ever thought about when you get your bonus? Timing can make a big difference. If you’re close to a tax band threshold (say, £50,270 for the Higher Rate), asking your employer to split your bonus across two tax years could keep more of it taxed at a lower rate. For example, if you earn £48,000 and expect a £10,000 bonus in March 2026, you could ask to receive £2,270 in March (staying under £50,270) and the rest in April, when the new tax year starts with a fresh Personal Allowance.
Be careful, though—this only works if your employer agrees, and they might not be keen on tweaking payroll schedules. Also, check your contract; some bonuses are tied to specific dates. Business owners, this is especially handy for you: you can control when bonuses are paid to employees, balancing tax efficiency with cash flow.
Salary Sacrifice for More Than Just Pensions
Now, here’s a trick not everyone knows about: salary sacrifice. This is where you give up part of your bonus in exchange for non-cash benefits, like extra pension contributions, cycle-to-work schemes, or childcare vouchers (still available for some schemes as of 2025, per GOV.UK’s salary sacrifice rules). These benefits aren’t taxed or are taxed less, saving you money.
For instance, sacrificing £3,000 of a £10,000 bonus for childcare vouchers could save a Basic Rate taxpayer £600 in tax and £240 in NICs. Business owners, this is a win-win: you reduce your payroll costs (less employer NICs at 15%), and your employees take home more. Just ensure the sacrifice is agreed before the bonus is paid—HMRC’s strict about this.
Watch Out for Emergency Tax Codes
Here’s a heads-up: emergency tax codes can sting. If your employer applies a temporary tax code (like 1257L M1, meaning “month 1” basis), they’ll tax your bonus as if you earn that amount every month, which can lead to overtaxing. In 2024, HMRC reported that over 1 million UK workers were on incorrect tax codes at some point, often after bonuses or job changes (GOV.UK tax code issues).
Case Study: Dafydd’s Tax Code DramaDafydd, a teacher from Wrexham, got a £4,000 performance bonus in October 2024. His employer used an emergency tax code, assuming he earned £4,000 monthly on top of his £30,000 salary. He was taxed at 40% on part of the bonus, losing £1,600 instead of the £800 he’d owe at the Basic Rate. Dafydd contacted HMRC, updated his tax code to 1257L (standard), and got a £800 refund by December 2024. Lesson? Always check your payslip and call HMRC if something looks off.
Tax-Free Allowances and Bonuses
Now, let’s talk about a little-known gem: tax-free allowances. Some bonuses can include non-taxable elements, like reimbursements for business expenses (e.g., travel or professional subscriptions). If your bonus includes £500 for a work-related course, that part might be tax-free if it’s a genuine business expense, per HMRC’s employment income manual. Ask your employer to break down your bonus clearly—sometimes they lump everything together, and you end up paying tax on bits you shouldn’t.
Here’s a quick table to show how a mixed bonus might be taxed:
Bonus Component | Amount | Taxable? | Tax (20%) | NICs (8%) |
Cash Bonus | £4,500 | Yes | £900 | £360 |
Travel Reimbursement | £500 | No | £0 | £0 |
Total | £5,000 | £900 | £360 |
Net Bonus After Deductions: £5,000 - £900 - £360 = £3,740
Business Owners: Structuring Bonuses Smartly
If you’re a business owner, you’ve got more control over how bonuses are structured, but it’s a balancing act. Paying bonuses increases your employer NICs (15% on earnings above £4,992 in 2025/26), so consider alternatives like dividends if you’re a director of your own company. Dividends are taxed at lower rates (8.75% for Basic Rate, 33.75% for Higher Rate, 39.35% for Additional Rate) and don’t attract NICs. However, you’ll need enough retained profits, and HMRC’s cracking down on “disguised remuneration” schemes, so get advice from a tax professional.
Another tip for business owners: offer non-cash bonuses, like gift vouchers up to £50 per employee per year, which are tax-free under HMRC’s trivial benefits rules. This keeps employees happy without bloating your payroll taxes.
People Also Ask: Can You Claim Back Overpaid Tax?
One common question popping up in Google’s “People Also Ask” is whether you can reclaim overpaid tax on a bonus. The answer? Absolutely. If you’ve been hit with an emergency tax code or your bonus pushed you into a higher band temporarily, you can claim a refund via HMRC’s online portal or by waiting until the tax year ends, when HMRC reconciles your payments. In 2024, HMRC processed over 500,000 refund claims, with an average payout of £750, so it’s worth checking.
How to minimize bonus tax in the UK?
Advanced Considerations and Long-Term Planning for Bonus Taxation
Right, you’ve got the basics of bonus taxation down and some clever tricks to keep more of your money. But what about the bigger picture? Whether you’re a contractor, a self-employed business owner, or just someone who gets regular bonuses, there are advanced strategies and quirks in the UK tax system that can make a real difference. This section dives into how bonuses impact specific groups, long-term tax planning, and some rare scenarios that could catch you out if you’re not prepared. Let’s get stuck in with practical advice and fresh insights for the 2025/26 tax year.
Bonuses for Contractors and Self-Employed: A Different Ballgame
Now, if you’re a contractor or self-employed, bonuses work a bit differently. Unlike employees on PAYE, you don’t get a “bonus” in the traditional sense—your income might come as irregular payments from clients or a big project payout. These are still taxed as part of your self-assessment income, but the timing and reporting can be trickier. For 2025/26, self-employed folks report their income via HMRC’s Self Assessment tax return, due by 31 January 2027 for the 2025/26 tax year.
Here’s the deal: if you get a £10,000 “bonus” payment for a project in December 2025, it’s taxed based on your total income for the year, using the same Income Tax bands as employees (£12,570 Personal Allowance, 20% Basic Rate, etc.). But you won’t see tax deducted upfront—you’ll pay it when you file your return. National Insurance is also different: you’ll pay Class 2 NICs (£3.45 per week if profits exceed £6,725) and Class 4 NICs (6% on profits between £12,570 and £50,270, 2% above that).
Case Study: Rhiannon’s Freelance WindfallRhiannon, a freelance graphic designer from Bristol, lands a £15,000 project payment in March 2026. Her annual profit is £35,000, so this “bonus” pushes her total to £50,000. She pays 20% Income Tax on the £15,000 (£3,000) and 6% Class 4 NICs (£900), keeping £11,100. To avoid a cash flow crunch, Rhiannon sets aside 30% of every big payment in a separate account for taxes. By registering for HMRC’s Budget Payment Plan, she spreads her tax payments monthly, avoiding a big bill in January 2027.
Tip: Use HMRC’s Self Assessment calculator to estimate your tax liability early, especially if you get irregular payments. This helps you avoid underpaying and facing penalties.
Bonuses and IR35: A Minefield for Contractors
If you’re a contractor working through your own limited company, IR35 rules could shake things up. If HMRC deems you’re “inside IR35” (i.e., working like an employee), your bonus or extra payments are taxed as employment income via PAYE, just like a regular employee. This means Income Tax and Class 1 NICs apply, and your client (or agency) deducts them before paying you. For 2025/26, this could mean 20%–45% tax plus 8% NICs on your bonus, depending on your income.
Now, here’s where it gets spicy: if you’re outside IR35, you can take money out of your company as dividends, which are taxed at lower rates (8.75% Basic Rate, 33.75% Higher Rate, 39.35% Additional Rate). A £10,000 bonus as a dividend saves you NICs entirely, and if you’re in the Basic Rate band, you’d pay only £875 tax instead of £2,000 (20% tax + 8% NICs) as an employee. Check your IR35 status using HMRC’s CEST tool to avoid surprises, as HMRC’s been cracking down since the 2021 reforms.
Long-Term Tax Planning with Bonuses
Let’s think ahead: regular bonuses can be a goldmine for tax planning if you play your cards right. One strategy is to smooth your income over multiple years. If you expect bonuses annually, consider deferring part of your income to a later tax year, especially if you’re near the £100,000 Personal Allowance taper or £50,270 Higher Rate threshold. For example, if you earn £95,000 and expect a £20,000 bonus, deferring £10,000 to April 2026 could keep you below the 60% tax trap (where your Personal Allowance shrinks).
Another long-term move is investing your bonus in tax-efficient vehicles like ISAs or Venture Capital Trusts (VCTs). For 2025/26, you can put up to £20,000 into an ISA, where any growth or income is tax-free (GOV.UK ISA rules). VCTs offer 30% Income Tax relief on investments up to £200,000, provided you hold them for five years. If you’re a Higher Rate taxpayer, a £10,000 VCT investment saves £3,000 in tax upfront, and dividends are tax-free.
Here’s a quick table comparing these options for a £10,000 bonus:
Option | Tax Saved | Key Benefit | Risk/Drawback |
Pension Contribution | £4,000 (40% taxpayer) | Reduces taxable income, grows for retirement | Locked until age 55 (rising to 57 in 2028) |
ISA Investment | £0 upfront, tax-free growth | Flexible access, no tax on gains | No upfront tax relief |
VCT Investment | £3,000 (30% relief) | Tax-free dividends, high growth potential | Higher risk, 5-year holding period |
Rare Scenarios: Bonuses and Tax Complications
Now, let’s cover some curveballs. Ever heard of non-cash bonuses? If your employer gives you shares, vouchers, or even a company car as a bonus, these are taxed as Benefits in Kind (BIK). For example, if you get £5,000 in company shares, you’ll pay Income Tax and NICs on their market value, per HMRC’s BIK rules. In 2024, HMRC reported over 200,000 employees received taxable non-cash bonuses, so it’s not as rare as you’d think.
Another quirky scenario: overseas bonuses. If you work for a UK employer but get a bonus for work done abroad, you might claim Foreign Service Relief if you’re non-domiciled in the UK. This could reduce or eliminate tax on that bonus, but you’ll need to prove the work was performed overseas—check HMRC’s residence rules. In 2023, a London-based consultant named Eleri saved £2,500 on a £10,000 bonus by claiming this relief for work in Singapore, but it took detailed records and a tax advisor to get it right.
Business Owners: Incentivising Employees Tax-Efficiently
If you’re a business owner, bonuses aren’t just about your own taxes—they’re a tool to keep your team happy without breaking the bank. Beyond trivial benefits (£50 gift vouchers), consider Enterprise Management Incentives (EMI) share schemes. These allow employees to receive share options with minimal tax (often just Capital Gains Tax at 20% on sale), while you save on employer NICs. In 2024, over 12,000 UK companies used EMI schemes, per HMRC stats, saving millions in payroll taxes.
Alternatively, profit-sharing schemes let you distribute bonuses tied to company performance. These are taxed as regular income for employees, but you can deduct them as business expenses, reducing your Corporation Tax bill (25% for profits over £250,000 in 2025/26).
People Also Ask: How Do Bonuses Affect Tax Refunds?
A common Google “People Also Ask” question is whether bonuses mess with tax refunds. If your bonus pushes you into a higher tax band or triggers an emergency tax code, you might overpay tax. In 2024/25, HMRC processed over 600,000 refund claims related to overtaxed bonuses, averaging £600 per claim. To check if you’re due a refund, use HMRC’s online tax checker or submit form P60 at year-end. Keep payslips and bonus breakdowns handy to speed things up.
Summary: Tax-Efficient Bonus Options 2025/26
For Employees
Pension Contribution: Up to £60,000/year, saves 20%–45% tax + 8% NICs. Locked until retirement.
ISA: £20,000/year, tax-free growth. No upfront relief but flexible access.
VCT: Up to £200,000, 30% tax relief, tax-free dividends. High risk, 5-year hold.
For Business Owners
Trivial Benefits: £50/employee/year, tax-free (e.g., gift vouchers).
EMI Share Schemes: Tax-efficient for employees, saves employer NICs.
Dividends: 8.75%–39.35% tax, no NICs, requires company profits.
Example: £10,000 Bonus (Higher Rate Taxpayer)
Pension: Saves £4,400 (tax + NICs), net cost £5,600.
Dividend: Saves £1,625 vs. PAYE, net cost £8,375.
ISA: No upfront saving, but growth tax-free.
Summary of the Most Important Points
Bonuses in the UK are taxed as part of your income under PAYE, using the same Income Tax bands (0% up to £12,570, 20% up to £50,270, 40% up to £125,140, and 45% above that) for the 2025/26 tax year.
National Insurance Contributions (NICs) apply to bonuses at 8% for earnings between £12,584 and £50,284, and 2% above £50,284, with employers paying 15% on earnings above £4,992.
Emergency tax codes can overtax bonuses by assuming you earn that amount monthly, but you can claim refunds via HMRC if overtaxed.
The 60% tax trap hits earners between £100,000 and £125,140 due to the Personal Allowance taper, effectively increasing tax on bonuses in this range.
Pension contributions from bonuses reduce taxable income, saving up to 40% tax and 8% NICs, with a £60,000 annual contribution limit in 2025/26.
Salary sacrifice for benefits like childcare vouchers or cycle-to-work schemes can lower tax and NICs on bonuses, benefiting both employees and employers.
Timing bonuses across tax years can keep income below higher tax bands, such as £50,270, to minimise tax liability.
Self-employed individuals pay tax on project “bonuses” via Self Assessment, with Class 4 NICs at 6% up to £50,270 and 2% above, due by 31 January 2027 for 2025/26.
Contractors inside IR35 face PAYE taxes on bonuses, while those outside IR35 can use dividends (taxed at 8.75%–39.35%) to save on NICs.
Non-cash bonuses, like shares or company cars, are taxed as Benefits in Kind, while trivial benefits up to £50 per employee are tax-free.
FAQs
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About the Author
Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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