How bonuses are taxed
UK bonuses are treated as ordinary employment income. They're taxed at your marginal rate — the rate that applies to the next pound of your earnings.
The marginal rate depends on your total annual income (salary + bonus):
| Annual income band | Marginal IT + NI | Net per £1,000 bonus |
|---|---|---|
| Under £12,570 | 0% + 8% = 8% | £920 |
| £12,571–£50,270 | 20% + 8% = 28% | £720 |
| £50,271–£100,000 | 40% + 2% = 42% | £580 |
| £100,001–£125,140 | 60% + 2% = 62% | £380 |
| £125,140+ | 45% + 2% = 47% | £530 |
Plus student loan: an additional 9% (or 6% PGL) on the bonus above your plan threshold.
The PAYE bonus-month spike
PAYE applies tax cumulatively per pay period. A bonus paid in October creates a temporary spike that month:
- October sees gross of salary + bonus
- PAYE calculates what the year-to-date tax should be based on annualised earnings
- The deduction in October is correspondingly larger
Subsequent months rebalance via cumulative calculation. By March/April, the total tax paid matches the marginal-rate calculation.
Example: £50,000 earner with £10,000 bonus paid in October.
- Without bonus, October PAYE: ~£625 Income Tax
- With £10,000 bonus, October PAYE: ~£4,500-£5,000
- November-March: cumulative calculation reduces deductions to balance
- Annual: total Income Tax matches a £60,000-earner's annual figure
This is why bonus months feel painful but the annual position is correct.
Sacrificing bonus into pension
The single most valuable tax move on a UK bonus: sacrifice some or all of it into pension before payment.
For a higher-rate earner with a £10,000 bonus:
| Action | Tax + NI cost | Pension contribution | Net to you |
|---|---|---|---|
| Take all as cash | £4,200 | £0 | £5,800 |
| Sacrifice 100% to pension | £0 | £10,000 | £0 cash (but full pension) |
| Sacrifice 50% to pension | £2,100 | £5,000 | £2,900 |
Both Income Tax and NI are saved. The full sacrificed amount reaches pension.
Must be arranged before the bonus is paid — check with HR before the payroll runs. Once paid, you can still contribute to pension personally but lose the NI saving.
Avoiding the £100k allowance taper
If your bonus would push total income across £100,000, the slice between £100k and £125,140 attracts an effective 62% marginal rate (40% Income Tax + 20% allowance loss + 2% NI).
Worked example: £95,000 salary + £10,000 bonus = £105,000 total income.
- £5,000 in 60% taper band: 60% × £5,000 = £3,000 extra tax above what 40% would imply
- That £5,000 of bonus is effectively a £2,000 net amount
By sacrificing £5,000 of the bonus into pension: - Total taxable income stays at £100,000 - Avoid the taper - The sacrificed £5,000 saves 60% + 2% = 62% effective - Net pension contribution costs £1,900 of would-have-been net pay
This is one of the highest-leverage tax-optimisation moves available in UK personal finance.
Bonus + student loan
PAYE applies the per-period student loan threshold. A big bonus month pushes earnings well above the period threshold:
For a Plan 2 borrower (threshold £29,385/year, £2,448.75/month):
- Normal month at £50,000 salary: monthly threshold £2,448.75; above by £1,718; 9% × £1,718 = £155 SL
- October bonus month (£4,167 + £10,000 = £14,167): above threshold by £11,718; 9% × £11,718 = £1,055 SL
That's £900 of additional SL deduction in October just from the bonus. November onwards returns to normal.
When the calculator overestimates
If you've just received a bonus, the actual PAYE deduction in that pay run may exceed the calculator's "tax on bonus" figure. This is the cumulative rebalance lag.
To check: wait 2-3 pay periods. PAYE will rebalance via reduced deductions. The cumulative total should match the calculator.
If after 3 months the deductions haven't rebalanced, contact payroll — there may be a code issue or other error.
Practical checklist
- Estimate the bonus using the calculator
- Identify your marginal band — bonus at 28% / 42% / 62% / 47% net
- Consider pension sacrifice — typically value-positive for higher-rate earners
- Watch for £100k taper — the most valuable single optimisation
- Account for student loan spike if applicable
- Don't panic at the bonus-month payslip — cumulative rebalance over 2-3 months
In short
UK bonuses are taxed at your marginal rate — 28% basic, 42% higher, 62% taper, 47% additional. PAYE may show a temporary bonus-month spike that rebalances over subsequent months. The single biggest optimisation is pension salary sacrifice before payment. Use the bonus tax calculator to model your specific situation.