When your bonus hits your payslip and the tax looks brutal, it's tempting to assume HMRC has taken an unfair bite. The reality is more nuanced โ and sometimes actually works in your favour. Here are five things most people never find out.
1. You might automatically get some of it back
UK PAYE is calculated cumulatively across the tax year. If your bonus was taxed heavily in one month because it pushed your combined pay into the 40% band, HMRC will correct this over the remaining months of the tax year โ reducing your monthly tax until the year balances out. You don't need to do anything.
2. Salary sacrifice into pension is the most efficient response
If you're expecting a bonus and your employer allows it, ask to have it paid directly into your pension via salary sacrifice. You save both income tax AND National Insurance on the entire amount. At the basic rate, that's 28% back in your pocket (20% tax + 8% NI). At the higher rate, it's 42% (40% + 2%). The pension still grows for you โ you just avoid the taxman on the way in.
3. Your bonus might not push you into the 40% band at all
Many people assume their bonus is taxed at 40% when it isn't. You only pay 40% on the amount above ยฃ50,270 (annual). If your salary is ยฃ42,000 and your bonus is ยฃ5,000, only ยฃ2,270 of the bonus is taxed at 40% โ the rest is at 20%.
4. Spreading it over two months (with employer agreement) can save money
Some employers will split a large bonus across December and January pay periods. If the total bonus doesn't cross a tax band boundary when split, the blended rate ends up lower than if it's all paid in one month. This isn't always possible, but it's worth asking about for very large bonuses.
5. Your employer also pays tax on your bonus
Your employer pays 13.8% employer NI on every pound of your bonus. This doesn't come out of your take-home โ but it does mean that for every ยฃ1,000 bonus your employer grants, they're actually spending ยฃ1,138. Some employers factor this into their bonus calculations. The salary sacrifice trick saves your employer NI too, which is why many are happy to support it โ and some pass the saving back to you as extra pension contributions.
Use our bonus tax calculator to see exactly what your bonus will look like after deductions.