While a bonus increases employees’ income and motivation at the same time, being a taxable earning, it may at times increase their pre-tax gross income, thus reducing their disposable income. Through this blog post, we will not only discuss the details of how a bonus tax impacts a salaried individual’s actual earnings but also ways to avoid this as well as some basic information regarding the UK taxation system. 

How Do I  Calculate Bonus Tax In The UK?

You can calculate the amount of tax that you pay on your salary bonus in the same way that the tax on your monthly income is calculated. Therefore, salaried individuals pay income tax and national insurance on a bonus as they would on a regular income. The reason for this is that when employees receive a bonus in the UK, it is treated in the same way as their income when it comes to tax calculations. 

This means that if you earn £30,000 a year and are classified as a basic rate taxpayer, you will be paying 20% tax and 12% national insurance on incomes in excess of £12,570. If you get a bonus of £3,000, you will still be paying 20% tax and 12% national insurance on this as well.

Sometimes the bonus that you earn may raise the level of your tax bracket which means that incomes (salary plus bonus) below a certain threshold will be taxed at a separate rate, while those in excess of the minimum limit will be taxed at a higher rate.

For instance, you earn $45,000 a year and are considered a basic rate taxpayer, paying 20% tax and 12% national insurance on incomes in excess of £12,570. However, you receive a bonus of £10,000 making your annual income £55,000; taking your annual earnings to a higher tax bracket. This means that high incomes and larger bonuses increase the amount of tax deductions.

In order to be able to calculate your annual bonus tax, you need to be able to learn about income tax rates and the band that your annual income may be classified under.

However, your employer will be making these calculations and informing the HMRC of the amount of bonus as well as tax being deducted from it as they prepare your salary details. These increased tax deductions (salary plus bonus) of employees will appear as an additional expense in the employer’s books of accounts, reducing their gross income and in certain cases, the corporation tax due upon them.

If you receive a non-cash bonus such as a company car, a private health scheme or recreational activities and rewards through your employer these will be considered a benefit-in-kind and will be taxed at their monetary value at a flat rate of 13.8%. 

How Can I Avoid My Bonus From Being Taxed?

You can avoid paying a tax on your bonus if all of it is transferred to your pension fund in the form of savings. However, many salaried individuals wait for their annual bonus to make necessary payments or make major purchases. In such cases, you may choose to utilise a proportion of your bonus for such payments while the rest is saved through your pension fund. In either case, you would need to inform your employer of your intentions so that they may make the necessary adjustments at the time of transfer of earnings.

The option of having your bonus (or a part of it) being saved through a pension fund may be of significant help if your bonus takes your annual income for that period into a higher tax bracket thus increasing the rate of tax applied to your earnings.

It must be noted that your pension fund may not be accessed until you are a minimum of 55 years of age. With the state pension age rising in the UK, it may be much later than this that you can access the funds. However, older employees may prefer this option due to the age bracket that they belong to.

What Sort Of Bonuses Are Tax-Free? 

Health benefits given to employees in the form of a non-cash bonus are exempt from being taxed. These include the following:

  • a single medical check-up per tax year
  • medical expense for work-related injuries and ailments
  • the medical expense of up to £500 that is included in a return-to-work plan
  • eye tests, glasses, and contact lenses (only if your job includes monitors or screens at work)

How Much Income Tax Do I Have To Pay?

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

  • 0 per cent income tax when income is up to £12,570
  • 20 per cent income tax when income is between £12,571 and £50,270 
  • 40 per cent income tax when income is between £50,271 and £150,000 
  • 45 per cent income tax when income is above £150,001

If you are self-employed, you are required to file a self-employed tax return to pay your taxes through a self-assessment. 

Which Incomes Are Tax-Free?

Incomes derived from any of the following sources are considered to be tax-free in the UK:

  • Transport costs of an employee’s (and their immediate family) relocation for work in the UK
  • Winnings from games, pool betting, lotteries or competitions with prizes
  • Long service employee awards (certain limitations apply)
  • Individual savings account amounting to £20,000
  • Incomes such as interest or dividends arising from savings accounts 
  • Pensions paid to war widows and dependents
  • Social security and state benefits include maternity allowance, employment and support allowance, attendance allowance, child tax credit and housing benefit. 

What Are The Different Taxes In The UK?

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol. 

Direct taxes are automatically deducted from your wages, income or pension before you receive them. This is termed Pay As You Earn. Anyone earning equal to or less than £12,750 is not eligible for PAYE as the amount is considered under the law as an individual’s allowance. 

Therefore, basic taxes in the UK include the following:

  • Income Taxes 
  • Property Taxes 
  • Capital Gains 
  • UK Inheritance Taxes 
  • Value Added Tax 

These are all progressive taxes; which means that the amount of tax increases with an increase in income.

Do I Have To Pay Taxes on Benefits?

Some state benefits are taxable while others are not. Below are details of each category:

Taxable state benefits include the following:

  • Bereavement Allowance 
  • Carer’s Allowance
  • Employment and Support Allowance (contribution related)
  • Jobseeker’s Allowance
  • Widowed Parent’s Allowance
  • Incapacity Benefit
  • Pensions paid by the Industrial Death Benefit scheme
  • State Pension

Non-taxable state benefits are listed below:

  • Attendance Allowance
  • Disability Living Allowance 
  • Guardian’s Allowance
  • Employment and Support Allowance (income-related)
  • Maternity Allowance
  • Severe Disablement Allowance
  • Bereavement support payment
  • Child Benefit 
  • Housing Benefit
  • Industrial Injuries Benefit
  • Child Tax Credit
  • Pension Credit
  • Universal Credit
  • Working Tax Credit
  • Free TV licence for over-75s
  • Income Support
  • Lump-sum bereavement payments
  • Personal Independence Payment 
  • War Widow’s Pension
  • Winter Fuel Payments and Christmas Bonus

Who Collects Tax Revenues In The UK?

The HMRC collects and administers tax collection in the UK. HMRC administers the following central taxes while local governments collect council tax:

  • Income tax
  • Corporation tax
  • Capital gains tax
  • Inheritance tax
  • Insurance premium tax
  • Stamp, land, and petroleum revenue taxes
  • Environmental taxes
  • Climate change and aggregates levy and landfill tax
  • Value-Added Tax
  • Customs duty
  • Excise duties

Who Is Tax Exempt In The UK?

Individuals may apply for tax exemption if they face  the following conditions:

  • If someone is a tax resident for at least one year out of the previous three years 
  • They have spent less than 16 days in the UK during the previous tax year
  • They are not a UK resident

The same applies in case:

  • Someone is not a tax resident for the previous three years
  • They have spent less than 46 days in the UK

Conclusion:

According to a general estimate, an individual pays one-third of their income in the form of taxes in the UK. While the amount of tax one pays depends on the scale of their income, some people will pay a higher tax due to the tax band assigned to them as per their income. This means higher the gross income (inclusive of salary and bonuses) higher the tax deduction of an individual. Bonuses are also taxed at the same rate as an individual’s salary and will be dependent on the tax band assigned to each income group. However, there are times when a bonus taxes your income to a higher tax band. In this case, a higher rate of deduction will be applicable to the incremental amount. 

FAQs: How Do I Calculate Bonus Tax In The UK?

How much will my bonus be taxed in the UK?

Your bonus will be taxed in the same way that the tax on your monthly income is calculated. Therefore, salaried individuals pay income tax and national insurance on a bonus as they would on a regular income. Depending on your earnings, you could be paying anywhere between 20 to 45 per cent of your bonus as a tax deduction with national insurance amounting to 2 to 12 per cent. 

Why is my bonus taxed at 40 per cent?

Your bonus is taxed at the same rate as your income. If you belong to an income tax band of 40 per cent, your bonus will be taxed at the same rate. However, depending on your earnings, you could be paying anywhere between 20 to 45 per cent of your bonus as a tax deduction with national insurance amounting to 2 to 12 per cent. 

Why is my bonus taxed so high in the UK?

Your bonus tax may appear high if your income is classified for a higher band for an income tax deduction. The reason for this is that a bonus will be taxed in the same way that the tax on your monthly income is calculated. Depending on your earnings, you could be paying anywhere between 20 to 45 per cent of your bonus as a tax deduction with national insurance amounting to 2 to 12 per cent. 

Are bonuses taxable?

Yes, bonuses are taxable as they are considered supplemental income.

Are bonuses part of gross income?

Yes, bonuses are part of your gross income. This is your total income including salary, bonus, and overtime which is considered a tax deduction.

References:

Expenses and benefits: bonuses: What to report and pay – GOV.UK

How are bonuses taxed in the UK? | Cash and non-cash bonuses

Why Is My Bonus Taxed So High UK? – Discover card

Are UK bonuses taxed? Here’s all you need to know

Tax-free bonus to employees in the UK – What you need to know

Income tax calculator 2022-23, 2021-22 and 2020-21

UK Tax Calculators

HM Revenue & Customs – GOV.UK

Income Tax – GOV.UK

Income Tax rates and Personal Allowances – GOV.UK

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