Bonuses: how are they taxed in the UK and can you avoid it?
16th Apr 2024 Managing your Money
2 min read
It’s exciting to receive a bonus following lots of hard work, but it can be frustrating to realise you’ll lose a good chunk of it to tax.
We look at how
bonuses are taxed for employees and whether there is anything you can legally
do to stop it from getting taxed.
Understanding your bonus
A bonus is taxed in the same way as your
standard income.
So, your PAYE, national insurance and
student loan payment (if applicable) will be adjusted for the month you receive
your bonus to account for the higher amount.
This means you won’t get to keep your full
bonus unless your income, including the bonus, is under the tax-free personal
allowance of £12,570. Let’s see how this works in practice.
You earn £30,000 per year with student
loans and a 5% cent pension contribution and receive a £1,000 annual bonus.
Typically, you pay around £266 in tax and £116
in national insurance on your gross monthly income of £2,500.
But during your bonus month, you’ll be taxed on
a gross income of £3,500 and pay around £460 in tax and £200 in national insurance.
How are bonuses taxed?
You pay national insurance and income tax on
all earned income, including bonuses, which can push you into a higher tax
bracket, so you pay an even higher tax rate on some or all of it.
If your annual income is £45,000 and
you get a £10,000 bonus, £4,730 will be taxed at 40%.
Someone on a salary of £45,000 is likely to have
a take-home pay of around £2,690 per month, depending on their pension
contributions, student loans, and any other deductibles.
During the month you get your bonus, you’re
likely to take home around £8,770 — losing around £3,920 in tax, national
insurance, and student loan payments.
Can you avoid paying tax on your bonus?
It’s frustrating when your bonus is hugely
reduced by tax, although there is a way to keep all of it in your pocket if
you’re happy to wait for it.
You can opt for a bonus sacrifice, which
involves paying up to 100% of your bonus into your pension pot. This
will be tax-free if the rest of the year’s pension contributions are under the
tax limit.
The annual tax-free limit for pension
contributions is £60,000 per year (or 100% of your salary) if you
earn under this amount.
Check your P60 to see how much you’ve
contributed, as you can carry over any unused allowance from the last three tax
years.
There’s just one catch to paying your bonus
into your pension. You won’t be able to access it until you’re at least 55 (this
will rise in the future), or you’ll pay a big tax penalty.
Many employers will let you designate a portion
of your bonus to be sacrificed to your pension, so you can still enjoy some of your
bonus now.
If someone on a £45,000 salary paid half of
their £10,000 bonus into their pension, they’d lose less through tax.
Watch out for scams
As your bonus is paid by your employer, who
must take tax off your gross income before it’s paid, there aren’t any other
legal routes to reduce the tax you pay on your bonus.
Anyone who offers a solution is simply not
telling the truth. Your employer could be in trouble for not correctly taxing
you, and you’ll have to repay any tax you owe later.
Need personal tax advice? You can find a qualified accountant via Unbiased.
They’ll help you be tax-efficient and understand
your obligations, particularly if you plan to set up your own business
or become self-employed.
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