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If you get a work bonus, you might wonder what taxes you must pay. This article tells you the tax rates and how to reduce taxes on your bonus.
Work bonuses get taxed in the UK. The tax rate is the same as for your normal income. It may increase if you enter a higher tax bracket. You can reduce tax by asking for non-taxable benefits of bonus sacrifice to your pension.
What Is the Tax Rate for Bonuses?
In the UK, bonuses get taxed like salaries. They are a monetary reward for your work. In England and Wales, salaries and bonuses are taxed as follows:
| Tax Bracket | Income | Tax Rate |
|---|---|---|
| Personal allowance | Up to £12,750 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| High rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
In Scotland, taxation is different, and the tax bands are as follows:
| Tax Bracket | Income | Tax Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Starter rate | £12,571 to £14,732 | 19% |
| Basic rate | £14,733 to £25,688 | 20% |
| Intermediate rate | £25,689 to £43,662 | 21% |
| Higher rate | £43,663 to £125,140 | 42% |
| Top rate | over £125,140 | 47% |
Your taxable income is your salary per year plus your bonus. Your bonus may push you into a higher tax bracket than normal.
For example, someone living in England may earn a salary of £49,000 per year. They are a Basic rate taxpayer. If this person gets a bonus of £2000, their income is £51,000 in the tax year the bonus is paid. They would become a High rate taxpayer.
What Else Is Deducted From a Bonus?
Because your bonus is treated like your salary, tax is not the only deduction. You must also pay:
- National insurance
- Student loan repayments if applicable
- Pension contributions
- Other deductions you may have
National insurance contributions range between 0% and 12%. Other deductions depend on your circumstances.
How Can I Find out the Tax Rate for My Bonus?
If you’re curious about how much bonus will reach your bank account, use a bonus tax calculator. Bonus tax calculators provide estimations, and the amount you get may differ.
Why Is My UK Bonus Taxed So High?
If your bonus is taxed higher than anticipated, there are a few explanations:
- You may have underestimated the tax. As tax rates are percentage based, the amount of tax increases with increasing income.
- You may have entered a higher tax bracket.
- You may have had a change in your tax code. Tax codes can change mid-tax year. This is so that your tax balance will be zero at the end of the year. If your tax code has changed, you should receive a notification from HMRC via email or post.
How Can You Reduce Taxes on Bonuses Legally?
Tax evasion is a crime, but there are legal ways to reduce income tax. There are a few ways you can try:
- Ask your employer to exchange your cash bonus for a non-taxable benefit. These include additional holidays, food, or medical check-ups.
- Ask for your bonus to be paid into your pension. Paying into a pension offers tax benefits and may be tax free.
There are limits on how much you can pay into your pension tax free. Expect to pay tax if you save more than:
- 100% of your earnings in a year
- £60,000 a year
How Can I Make a Bonus Sacrifice?
Paying your bonus into your pension to save tax is called bonus sacrifice. If you want to make a bonus sacrifice, let your Human Resources department know. Do this as soon as you find out you’ll get a bonus.
Your employer then pays your bonus into your pension. You’ll automatically get 20% tax relief. High-rate or additional-rate taxpayers can claim the remaining tax relief when filing a self-assessment.
Do Work Bonuses Get Taxed in the UK? Summary
Unlike lottery winnings, Work bonuses get taxed in the UK. You may pay more tax if your bonus pushes you into a higher tax bracket.
In addition to taxes, you also have the same other deductions as with your ordinary salary. If you want to lower the tax on your bonus, ask your employer to pay it into your pension.
You may also like reading about what to do if you have been underpaid.
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