How Bonus Tax Works in the United Kingdom
In the United Kingdom, bonuses — including annual bonuses, performance bonuses, and discretionary payments — are taxed as part of your annual income. HMRC uses the annual equivalent method: your bonus is added to your total annual salary, and the additional tax liability is calculated at your marginal rate.
This means a bonus doesn't have its own special tax rate. Instead, it's taxed at whatever bracket your combined annual income (salary + bonus) falls into. For someone earning £25,000/month, a one-month bonus pushes annual income from £300,000 to £325,000, and the bonus portion is taxed at the 26% marginal rate.
Many employees are surprised by how much tax they pay on bonuses because the effective tax rate on normal salary (which benefits from lower brackets on the first portions of income) is much lower than the marginal rate applied to the bonus. Our calculator shows you the exact tax impact so there are no surprises.
Frequently Asked Questions
How is bonus tax calculated in the United Kingdom?
HMRC adds your bonus to your annual salary, calculates total annual tax, then subtracts the tax on your normal salary alone. The difference is the tax on your bonus. This effectively taxes the bonus at your marginal rate — the highest bracket your total income reaches.
Is a annual bonus taxed differently?
No. A annual bonus is simply an extra month's salary and is taxed identically to any other bonus. It's added to your annual income and taxed at your marginal rate. There is no special reduced rate for annual bonuses.
Why is bonus tax so high?
Bonus tax feels high because it's taxed at your marginal rate, not your average effective rate. Your normal salary benefits from lower brackets on the first portions of income, but the bonus sits entirely in your highest bracket. For example, if your marginal rate is 31%, the full bonus is taxed at roughly 31%.
Can I reduce the tax on my bonus?
Yes — a bonus sacrifice into your workplace pension saves both income tax and National Insurance, and personal pension contributions get relief at your marginal rate (within the £60,000 Annual Allowance). If a bonus takes your income over £100,000, a pension contribution can also restore your Personal Allowance.
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