Bonus tax rules in the UK: How to tax bonuses correctly

A bonus payment forms part of an employees’ taxable income, and so tax is due on bonuses. Employers need to understand how bonus tax rules work in the UK so that they are informed when considering offering bonuses to employees, and know how to pay employees bonuses to comply with tax laws.

This article will cover how bonuses are taxed in the UK, how the taxation of bonuses impacts other payroll deductions, what an employer needs to know regarding bonus tax, and how bonus sacrifice schemes work.

How are bonuses taxed in the UK?

In the UK, bonuses are taxed in the same way as standard income – both income tax and National Insurance Contributions (NICs) apply. Additional deductions like student loan repayments and child support payments can also be affected by bonuses.

The amount of tax and NIC payable depends on the income tax bracket the employee pays tax at. Receiving a bonus can push an employee into a higher tax bracket.

Added as taxable income to the month’s pay, the bonus is paid in and taxed through the PAYE system. Employers apply the employee’s tax code to the taxable income as part of their payroll calculations.

The only way an employee would avoid all tax on a bonus is if their total pay, including the bonus, is below their personal allowance: the amount of income they can receive in a tax year before paying tax. In most cases, the personal allowance for 2024/25 is £12,570.

Employer bonus tax obligations

Employers must notify HMRC of the bonus and add the amount to the employee’s earnings, applying income tax and NI via the PAYE system. 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.

Taxing different types of bonuses

Bonuses can be given to employees in cash or non-cash form as part of a startup salary. Cash bonuses are most common. They must be reported to HMRC, and tax paid as shown in the examples below.

Non-cash bonuses, like company cars or private health insurance, are taxed through the benefit-in-kind system, which has different rules that employers need to follow for each specific item. If an employee is given a non-cash bonus that can easily be converted to cash, you should follow the same rules as those applicable to a cash bonus, and report and pay the tax through the PAYE system.

HMRC offers further advice in its guide to expenses and benefits.

Bonus taxes for basic rate taxpayers

For employees earning between £12,570 and £50,270 annually, income tax is payable at 20% on all income earned, including bonuses.

Employees with the standard tax code, 1257L, can earn £12,570 without paying tax. This means the first £1,047.50 earned each month is not taxed.

Employee Class 1A NIC rates were reduced for the 2024/25 tax year, so a basic rate taxpayer now pays 8% on earnings above £1,047.50 a month (or £242 a week).

An example

For an employee who earns £36,000 a year – or £3,000 a month – and is paid a £2,000 bonus, in the month they receive the bonus, they will pay the following income tax and NI:

• The taxable income is £3,952.50 (£3,000 minus £1,047.50 is £1,952.50, plus £2,000). At 20%, the income tax is £790.50
• NI applied to the same amount, £3,952.50, at 8% is £316.16
• The actual income tax applied to the bonus itself is 20% of £2,000, which is £400
• The actual NI applied to the bonus itself is 8% of £2,000, which is £160

Bonus taxes for higher rate taxpayers

Employees earning between £50,270 and £100,000 annually, including bonuses, pay income tax at 40%. Higher rate taxpayers also pay an additional 2% NIC on earnings above £967 a week, equivalent to £4,290 a month.

Higher earners and the 60% tax trap

Employees who earn between £100,000 and £125,000 must be wary of a hidden tax. The personal allowance is reduced by £1 for every £2 earned above £100,000, which means it disappears when annual earnings reach £125,000. Employees pay 40% tax, but also pay an additional 20% due to the reduced allowance. This means affected employees end up paying 60% income tax for this income range.

Additional rate taxpayers

Employees who earn more than £125,140 annually or £10,428.50 monthly pay 45% tax on earnings above this amount, including bonuses. There is no additional rate for NI.

How are other deductions treated?

If an employee is repaying a student loan, bonus payments form part of their income, which is assessed for student loan repayments. Employees make repayments from their bonus, as they would from their regular salary.

The exact rate for student loan repayments depends on when the student started an undergraduate course. If it was before September 2012 (Plan 1), they repay 9% of their income above £19,895. If it was after September 2012 (Plan 2), they repay 9% of their income above £27,295.

For employees who receive a bonus and earn above £50,000, if they or their partner receive child benefit, they may be liable for the High Income Child Benefit charge.

This is based on the highest earner’s income, who is charged 1% of the child benefit payment for every £100 of income above £50,000.

Is it possible to avoid paying tax on a UK bonus?

It is not possible to avoid paying tax on a bonus entirely. To do so would be tax evasion, which is illegal. However, there are ways to potentially reduce the tax payable, including investing the money in an ISA – all contributions below the annual ISA allowance (£20,000 for 2024-25) are tax-free – or using the bonus sacrifice scheme.

What is the bonus sacrifice scheme?

The most common way to reduce the tax employees pay on bonuses is to use the bonus sacrifice scheme. This instructs employers to pay some, or all, of a bonus into the employee’s pension fund, which enables them to avoid paying income tax and NI on the bonus. The more of the bonus paid into a pension, the more tax is saved.

Pension contributions are tax-free up to specified annual limits. The drawback is that you can’t access the bonus until you reach the minimum retirement age, currently 55 and rising to 57 in 2028. Some employers allow you to receive some into the pension fund, reducing the tax you pay, and the rest of the bonus immediately, which will be taxable.

How does bonus sacrifice work?

An employee must instruct their employer to pay some, or all, of the bonus into their pension as a bonus sacrifice. There are limits, but they are quite high – you can contribute up to £60,000 or 100% of your salary (whichever is lower) tax-free into a pension scheme in 2024-25.

Under pension annual allowance rules, you can carry forward unused allowances for the previous three years, so if an employee does not use the full £60,000, they can carry the unused amount forward and apply it to any bonus received in the next three years.

Is bonus sacrifice a good idea?

This depends on an individual’s specific circumstances, total pension savings, the pension scheme they are in, and how close to retirement they are.

It can be a good option for higher earners who are taxed at a higher rate on their bonus. For lower earners, it can still be useful as they will avoid paying tax on the bonus, though they may have more urgent commitments that mean they need to use bonuses now, for other purposes.

The drawback to using bonus sacrifice is that the funds are locked away as a non-liquid asset, until pension age.

For many, putting some of a bonus into a pension scheme that uses bonus sacrifice and lowers tax, and receiving some as liquid funds now is a sensible choice.

Read more: Everything you need to know about salary sacrifice schemes

Conclusion

Employers need to understand the tax implications of paying bonuses to staff, and how payroll professionals account for the impact bonus payments have on other payroll deductions.

Employees should consider the tax implications of receiving a bonus, and how they can choose to save tax and NI by instructing their employer to pay some or all of the bonus into their company pension as a legal way to reduce tax.

HMRC has more guidance on how bonuses are taxed.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.