How Much Tax will I Pay on Bonus?

Why Your Bonus Seems Highly Taxed

The primary source of confusion surrounding lump-sum payments like annual or performance bonuses lies not in a secret ‘bonus tax rate,’ but in the administrative mechanism used to collect taxes: the Pay As You Earn (PAYE) system.

Expert Insight: It is a pervasive myth that bonuses are taxed differently from your regular salary. They are not. A bonus is simply treated as regular employment income, known as ‘taxable earnings’ by HMRC.

The tax rate applied is your marginal rate, the highest rate of tax you pay on your income, but the deduction made by your employer in that specific pay period is often inflated due to the PAYE system’s operational logic.

The PAYE System: A Predictive Calculation

When your employer processes your monthly or weekly payroll, the PAYE system performs a calculation based on two key pieces of information:

Your Tax Code: This dictates your Personal Allowance (the amount you can earn tax-free, typically £12,570 for the 2024/2025 tax year).
Your Earnings in that Period: Including your regular pay plus the bonus.

Crucially, the system works on the assumption that the amount you earned in that single pay period (your regular pay + the bonus) is what you will earn every single pay period for the rest of the tax year.

Example: If your monthly salary is £3,000, and you receive a £10,000 bonus, your taxable income for that month is £13,000. The PAYE system effectively projects an annual salary of £156,000 (£13,000 x 12).

Based on this inflated projected annual income, the system calculates the corresponding Income Tax and National Insurance Contributions (NICs) due and deducts a proportionate amount of the full year’s estimated tax liability in that single month.

This overestimation is why you ask yourself: How much tax will I pay on bonus? and often find the answer to be initially disappointing.

While this often results in ‘over-taxation’ in the short term, the system usually balances out over the remaining months, or HMRC will issue a refund after the tax year ends (the P800 process). However, for a high earner or someone entering the 40% band, the impact is instantaneous.

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How Much will I Pay Tax on Bonus?

This is the question: How much will I pay tax on bonus?

Let’s keep it simple:

If you earn:

Up to £12,570 – You don’t pay Income Tax (Personal Allowance)
£12,571 – £50,270 – You pay 20% (Basic Rate)
£50,271 – £125,140 – You pay 40% (Higher Rate)
Above £125,140 – You pay 45% (Additional Rate)

So, your bonus gets stacked on top of your income and taxed accordingly. If your bonus pushes you into a new bracket—even temporarily—you may pay a higher rate on that part only.

Want to Know How Much Tax Will Be Withheld from Your Bonus? Use Our Bonus Tax Calculator!

Is My Bonus Taxed at 40%?

The straightforward answer to “Is my bonus taxed at 40%?” is: Only the part that falls into the Higher Rate tax band or above.

For the 2024/2025 tax year, the UK Income Tax bands (applicable to England, Wales, and Northern Ireland) are as follows:

Income Band (Excluding Scotland)	Income Tax Rate
Up to £12,570	0% (Personal Allowance)
£12,571 to £50,270	20% (Basic Rate)
£50,271 to £125,140	40% (Higher Rate)
Over £125,140	45% (Additional Rate)

(Note: Scottish Income Tax rates and bands differ and operate under a six-band system, which a specialist Scottish Tax Advisor should consult on. For the purpose of this article, we focus on the main UK tax regime).

The Combined Effect: Income Tax and National Insurance Contributions (NICs)

When calculating How much tax will I pay on bonus, we must consider both Income Tax and NICs, as both are mandatory deductions on your bonus.

Annual Earnings Band	Employee Primary NIC Rate (After April 2024)	Income Tax Rate	Total Marginal Deduction
£12,571 – £50,270	8%	20%	28%
£50,271 – £125,140	2% (Over Upper Earnings Limit)	40%	42%
Over £125,140	2%	45%	47%

This table clarifies a crucial point: if your regular salary already places you in the Higher Rate tax bracket (earning over £50,270), then every pound of your bonus will indeed be taxed at a minimum marginal rate of 42% (40% Income Tax + 2% NIC). Therefore, while the Income Tax rate is 40%, the combined deduction is higher.

Practical Example: When the Bonus Hits the Higher Rate

Let’s consider an individual with an annual salary of £45,000 who receives a £10,000 bonus:

Income Tax Calculation:
- Annual income before bonus: £45,000.
- Total income with bonus: £55,000.
- Income taxed at 20%: £50,270 – £12,570 (PA) = £37,700.
- Income taxed at 40%: £55,000 – £50,270 = £4,730.
- The first £5,270 of the bonus (£50,270 – £45,000) is taxed at 20%.
- The remaining £4,730 of the bonus is taxed at 40%.
National Insurance Calculation:
- The bonus falls between the Upper Earnings Limit (£50,270) and the tax bracket, meaning most of the bonus will trigger the lower 2% NIC rate, as the 8% NIC band is already largely used by the regular salary.

In this scenario, a portion of the bonus is definitely taxed at the 40% Income Tax rate, leading to the high deduction. The key message remains: the bonus is stacked on top of your existing income, and the marginal rate applied is determined by where the top slice of that bonus lands.

What Is the 60% Tax Trap?

The 60% tax trap affects individuals whose adjusted net income falls between £100,000 and £125,140.

Within this income range, the £12,570 Personal Allowance (PA) is progressively withdrawn at a rate of £1 for every £2 earned over £100,000.

The Breakdown of the 60% Marginal Rate:

Income Tax: Any income earned in this zone is taxed at the Higher Rate of 40%.
Personal Allowance Loss: Because you earn an extra £1, you lose £0.50 of your tax-free allowance. Losing £0.50 of tax-free allowance is equivalent to paying tax on that £0.50 at the Basic Rate of 20% (£0.50 x 20% = £0.10).
- When you lose £0.50 of allowance, you pay 20% tax on that amount, which is £0.10.
- When you earn £1, you pay 40% tax on it (£0.40).
- Total Tax Paid: £0.40 (Income Tax) + £0.20 (Tax due to PA loss, which is £0.50 x 40% for every £1 earned) = £0.60, or 60%.
The NIC Multiplier: Since your income is also subject to the 2% NIC (as you are well above the NIC Upper Earnings Limit), the true marginal deduction rate in this band is closer to 62%.

If your bonus payment, or a portion of it, pushes your annual adjusted net income into this £100,000 to £125,140 bracket, a significant portion of that bonus will be lost to the trap.

This is why it is absolutely critical for high-earning professionals to understand How to avoid the 60% tax trap?

How to Avoid the 60% Tax Trap?

The most effective way to manage and circumvent this crippling tax band is to reduce your Adjusted Net Income (ANI). ANI is calculated after deducting reliefs such as Gift Aid donations and, most importantly, gross (pre-tax) pension contributions.

The golden rule for How to avoid the 60% tax trap? is to utilise pension contributions to bring your ANI back below the £100,000 threshold.

Practical Steps:

Determine the Gap: Calculate your total projected annual income, including the bonus. If this exceeds £100,000, calculate the exact amount you are over.
Target Contribution: You need to make a gross pension contribution equal to the amount you are over £100,000. For example, if your income is £120,000, you need a gross contribution of £20,000 to bring your ANI back to £100,000.
The Result: By contributing that £20,000, you not only save the 60%+ marginal tax on that amount but also benefit from the full restoration of your £12,570 Personal Allowance. This makes pension contributions the single most potent tool for managing income in this band.

Understanding Your Tax Code

Your tax code helps employers know how much tax-free income you’re entitled to. The most common one is 1257L, meaning you can earn £12,570 before paying tax.

A wrong tax code can lead to too much or too little tax taken from your bonus. Always check your payslip or contact HMRC if something seems off.

What is the most tax-efficient way to pay a bonus?

Moving beyond simple avoidance, a true expert seeks to optimise the payment structure itself. For a business owner, director, or employee receiving a substantial lump sum, the method of receipt is paramount.

The strategic answer to What is the most tax-efficient way to pay a bonus? invariably involves pensions or specific investment vehicles.

Strategy 1: Salary Sacrifice and Pension Contributions (The Tax Advisor’s Favourite)

This is the consensus answer for the most tax-efficient route for the employed.

Mechanics:

You agree with your employer to forgo receiving the cash bonus.
In exchange, the employer agrees to contribute the equivalent value (or more) directly into your registered pension scheme. This is known as an Employer Contribution or a Salary Sacrifice arrangement.

Tax Advantages:

Zero Income Tax: Since the money is paid directly into your pension, it never enters the PAYE system as taxable income.
Zero National Insurance: Crucially, both the employee and the employer avoid paying NICs on the contributed amount. The employer’s saving can often be shared with the employee, resulting in an even larger pension contribution.
Tax-Free Growth: The funds grow free of UK Income Tax and Capital Gains Tax.
Tax Relief: If you are a high earner, the pension contribution is made gross, meaning it is offset against your highest marginal rate of tax, helping you reclaim tax at 40% or 45% (and potentially reclaiming the Personal Allowance lost in the 60% trap).

This strategy provides an absolute answer to How much tax will I pay on bonus? The answer is zero Income Tax and zero NICs, provided it is paid via a legitimate salary sacrifice scheme into an approved pension, up to the Annual Allowance limit.

Strategy 2: Utilising Carry Forward

For individuals who have made lower pension contributions in previous tax years, the Carry Forward rule allows them to use unused Annual Allowance from the three preceding years.

If a large bonus threatens to trigger the 45% Additional Rate tax band or the 60% tax trap, using Carry Forward can allow a massive, tax-free contribution to be made in the current year, providing exceptional tax relief.

This is highly technical and requires specialist advice from a UK Tax Advisor/Accountant to ensure the rules are strictly followed.

Strategy 3: Investment Schemes (EIS, SEIS, and VCTs)

For the most affluent individuals receiving exceptionally large bonuses, capital preservation and tax minimisation extend beyond pensions.

Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS): These provide generous Income Tax relief (30% for EIS, 50% for SEIS) on the investment amount, which can be claimed against your taxable income, effectively reducing How much tax will I pay on my bonus in the UK overall.
Venture Capital Trusts (VCTs): VCTs offer 30% Income Tax relief on investments up to £200,000 per tax year, provided the investment is held for a minimum of five years.

While not direct alternatives to an employee bonus, strategically timed investments in these vehicles can provide substantial offsets against a high tax bill triggered by a lump-sum payment.

Strategy 4: Charitable Giving (Gift Aid)

For those inclined to donate, using the Gift Aid scheme is another expert way to reduce your ANI and claw back lost Personal Allowance, helping you manage How to avoid the 60% tax trap?

When you make a Gift Aid donation, the charity claims the 20% Basic Rate tax from HMRC. If you are a 40% or 45% taxpayer, the donation effectively extends your Basic Rate band, meaning you can claim the additional 20% or 25% tax back via your Self-Assessment tax return.

Furthermore, the gross amount of the Gift Aid donation (the donation plus the claimed Basic Rate tax) reduces your ANI for the purpose of the £100,000 threshold test.

Explore Our Free Tax Calculators and Tools

National Insurance and Bonuses

Bonuses aren’t just taxed through Income Tax, National Insurance Contributions (NICs) also apply.

For employees:

You pay 12% on earnings between £12,570 and £50,270
You pay 2% on anything above

So yes, your bonus will trigger National Insurance too.

How Employers Calculate Bonus Tax

Employers often include the bonus in your monthly wages and process it through the PAYE system. This might result in you being taxed more for the moment if your monthly earnings make it seem like your yearly income is higher than it is.

The system calculates your income for the year based on that particular month. You might pay extra at first, but things should balance out over time.

Impact of Large Bonuses on Tax Brackets

A large bonus can bump you into a higher tax band, but only for the part that crosses the threshold. You won’t lose your entire bonus to tax, just a higher percentage on the extra bit.

Example: If you earn £48,000 and get a £7,000 bonus:

£2,270 of that bonus will be taxed at 40%
The rest still gets 20%

So don’t worry, you’re not losing half your bonus.

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Can I Reduce the Tax on My Bonus?

Short answer: yes, in some situations.

You might reduce tax by:

Increasing pension contributions
Choosing salary sacrifice schemes
Timing bonuses in a lower-income year

It’s all about planning and using smart financial tools.

Explore Our Free Tax Calculators and Tools

Other Deductions on Bonuses

Beyond tax and NICs, bonuses might face:

Student Loan repayments
Workplace pension auto-enrolment
Court orders or child maintenance (if applicable)

All these affect what finally hits your account.

The End of the Tax Year: Reconciliation and Refunds

A crucial piece of advice for anyone asking How much tax will I pay on my bonus in the UK? is to understand the reconciliation process. Because the PAYE system often over-taxes lump sums, many employees are due a refund at the end of the tax year.

P60: Your end-of-year statement (issued after 5th April) summarises your total pay and total tax deducted for the entire tax year.
HMRC Review (P800): HMRC automatically reviews your tax position after the tax year ends. If they identify that you have overpaid tax (due to the predictive nature of the bonus deduction), they will send you a P800 Tax Calculation. This will detail the overpayment and explain how you can claim your refund (usually via a cheque or a BACS transfer).

It is the mark of a prudent individual, to proactively check their P60 against their P45 (from previous employment, if applicable) and their own records to ensure accuracy, rather than simply waiting for HMRC.

Got a bonus? See how much you’ll actually take home with our Bonus Tax Calculator!

The Bottom Line

Bonuses feel like a great reward, but the question “How much will I pay tax on bonus“ can take away some of the excitement. Here’s the good part: you can now see how it’s calculated.

Your bonus will increase your take-home pay. However, taxes and deductions might lower that amount more than you expected. If you learn how the system works and think ahead, you can find ways to get the most out of every pound.

FAQs

Why did I get taxed so much on my bonus?
Because bonuses are taxed via PAYE and may temporarily make it look like you’re earning more for the year, triggering higher deductions.
Can I avoid paying tax on my bonus?
Not avoid—but you can reduce it by putting your bonus into your pension or using salary sacrifice options.
Will my bonus push me into a higher tax bracket permanently?
No, only the portion that goes over the threshold is taxed at a higher rate for that period.
What if my tax code is wrong?
An incorrect tax code could result in over-taxation. Always check it and contact HMRC if needed.
Can I get a tax refund on a bonus?
Yes, especially if you’ve been overtaxed. HMRC typically corrects it after the end of the tax year.

Explore Our Free Tax Calculators and Tools