How your bonus is taxed
A bonus isn't taxed at a special rate, but the way PAYE and National Insurance work can make it look heavily docked. This guide explains what really happens and how to keep more of it.
A bonus is just more income
Your bonus is added to your earnings and taxed at your normal Income Tax rates, 20%, 40% or 45% depending on your total income, plus National Insurance (8% or 2%) and any student loan. There's no separate "bonus tax". If your bonus pushes part of your income into a higher band, only that part is taxed at the higher rate.
The PAYE and NI timing effect
Because PAYE often assumes your bonus month is your normal month, it can over-tax that payslip and over-charge NI (which is calculated per period). It usually evens out over the year, Income Tax corrects automatically, but the NI on a one-off bonus genuinely is higher than if the same money were spread across the year. That's why a big bonus payslip can feel brutally taxed.
Sacrifice the bonus into your pension
The most effective move is bonus sacrifice: redirect some or all of the bonus into your pension before it's paid. You avoid Income Tax and National Insurance on the sacrificed amount, and many employers add their NI saving too. For higher earners, especially anyone whose bonus crosses £100,000 into the 60% allowance-taper zone, this can be dramatically more valuable than taking the cash.
Rescue from the 60% band
Common mistakes
- Thinking bonuses are taxed at a penalty rate. They're taxed at your normal rates; PAYE/NI timing just makes one payslip look heavier.
- Not considering pension sacrifice. For higher earners it can save 40 to 60%+ versus taking the cash.
- Ignoring the £100k taper. A bonus over £100k triggers the 60% effective band, plan around it.
- Forgetting student loan. A bonus also attracts 9% (or 6% postgraduate) student-loan deductions above the threshold.