The bonus lands, the payslip arrives, and roughly half of it appears to have gone. People conclude that bonuses are taxed at some special punitive rate. They are not. A bonus is simply more salary paid in one go, so it is taxed at the top of your income rather than the bottom, and that is where the rates are highest. Here is what that means at real salaries, and the one legal way to keep all of it.
What actually happens
A bonus is added to your earnings for the year and taxed at whatever marginal rate that puts you on: 20%, 40% or 45% income tax, plus National Insurance at 8% up to £50,270 of earnings and 2% above it. Because the bonus sits on top of everything else, none of it gets the personal allowance or the cheap end of the basic-rate band. Those were used up by your salary in the other eleven months.
The payslip can look worse than that in the month it is paid, because PAYE assumes for a moment that you earn that much every month and over-deducts. It corrects itself over the following months, so the year-end position is the one that matters, and it is the one below.
What you keep of a £10,000 bonus
On an annual basis, income tax and employee NI together:
| Salary | You keep | Taken |
|---|---|---|
| £35,000 | £7,200 | 28% |
| £55,000 | £5,800 | 42% |
| £95,000 | £4,800 | 52% |
| £130,000 | £5,300 | 47% |
The row to look at is £95,000. That bonus carries its earner from below £100,000 to above it, and every pound over £100,000 also removes 50p of personal allowance, so the income tax rate on that stretch is effectively 60%, with 2% NI on top. Someone on £130,000 keeps more of the same bonus than someone on £95,000, because their allowance had already gone. The 60% trap, and the legal way out.
Nobody on £95,000 is taxed at 62%. Their next £10,000 is. The bonus is what makes the difference visible.
The way to keep all of it
If your employer offers salary sacrifice, you can usually ask for some or all of a bonus to go straight into your pension before it is paid. Because it never reaches you as pay, there is no income tax and no National Insurance on it at all: the full £10,000 lands in the pension. Your take-home for the year is exactly what it would have been with no bonus, and the pension is £10,000 larger rather than the £5,800 or £4,800 you would have banked after tax.
Put another way: on £55,000, sacrificing the bonus turns £4,200 of tax and National Insurance into pension. On £95,000 it is £5,200, more than half the bonus, because that is the band where the taper bites. The higher your marginal rate, the more of the bonus the sacrifice rescues, which is why the people it helps most are the ones whose payslips looked worst.
Many employers also pass on some of the 15% employer NI they save, which makes the pension figure larger still. How salary sacrifice works, and what to ask for.
The catch is the obvious one: the money is in a pension, so it is not available until at least 55, rising to 57 in 2028. For a bonus you were going to spend on something specific, that is a real cost. For a bonus you were going to save anyway, it is close to free money, and for anyone in the 60% band it is the single most valuable decision on the payslip.
Two things worth checking
- Child Benefit. If the bonus takes your income over £60,000 and there are children in the household, the High Income Child Benefit Charge starts clawing the benefit back. Sacrificing enough of the bonus to stay under is often worth more than the tax saved. How the charge works.
- The deadline. Sacrifice has to be agreed before the bonus is paid, and usually before it is announced. Ask HR now, not on payday.
Put your own salary and bonus into the bonus tax calculator to see what you keep, then the salary sacrifice calculator to see what goes into the pension instead. Anyone near £100,000 should run the high earner optimiser as well.