Many a time, taxpayers may have questions regarding how their income, bonus or pension gets taxed. Through this blog post, we aim to learn the reasons why some taxpayers may feel that the bonus on their salary is being taxed at a high rate in the UK. For a deeper understanding of bonuses are taxed, we will also discuss whether certain bonuses are tax-free, what a basic tax rate is; as well as the concept of Personal Allowance for a tax deduction in the UK.

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. 

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.

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)

What Is A Basic Rate Tax Code?

A Basic Rate or BRX tax code is an emergency tax code that indicates that all your incomes must be taxed at the basic rate of 20 per cent without taking into consideration your tax-free Personal Allowance. 

It is usually applied when the HMRC and your employer do not have complete details regarding your employment and/or income details and the BRX tax code is assigned to you while the documentation is complete and a permanent tax code can be assigned to you.

In addition to this, you can be assigned a BRX tax code if:

  • an individual has not provided their employer with a complete P45 form or a P47
  • someone is being transferred from being self-employed to a PAYE employee
  • you are receiving an additional income through a second job or a pension

If you think you’ve been assigned a BRX tax code by mistake you should provide the required documents and details to your employer or HMRC so that a correct tax code can be assigned to you. If you fail to do so, you may end up overpaying your taxes.

On the other hand, it is likely that you are a high taxpayer you should be assigned a D0 tax code and you are underpaying your taxes with a BRX tax code. If you do not correct this error, you may have to pay the due amount of taxes in lump sum amount once the error is realised by your employer or HMRC and a correct tax code is assigned.

What Is The D0 Tax Code?

The D0 tax code indicates that the individual will be liable to pay income tax at a higher rate of 40 per cent for all their incomes. It is commonly used in cases where individuals have more than one job or pension. The HMRC issues this tax code to individuals if all of their tax-free allowances have been used against another source of income. 

Individuals are assigned a D0 tax code because (a) they have multiple sources of income and (b) calculations predict that their second source of income will cause their total combined gross earnings to be between £37,701 and £150,000. This is only after any tax-free allowance has been deducted.

What Is Personal Allowance?

When you are working in the UK, there is a certain amount of your income that remains tax-free as it is considered to be a Personal Allowance. The amount set for Personal Allowance during the 2021-2022 tax period is £12,750. 

Your personal allowance is applicable to your combined incomes from different sources. However, for the purpose of tax deduction, your main or primary job, which is also the source of a higher income is considered for Personal Allowance deduction prior to a tax rate is applied.

Since you get Personal Allowance once (it does not apply to each individual source of income), it may be in your own interest to have it applied to your main job and not the second one. However, if someone works two jobs and their cumulative income is less than the Personal Allowance amount of £12,750, they can have it spilt across both incomes. Sometimes a second job may increase your tax bracket which leads to a higher tax deduction on your income with an insignificant impact on your take-home salary.

Your second job is usually considered to be the one that provides a lower income than the first one and there is no consideration for Personal Allowance since it has already been accounted for. The reason is that the HMRC divides your total income by sources to calculate the amount of tax that is due on your cumulative income.

Conclusion:

The discussion in this article makes it apparent that a bonus is taxed in the same way that the tax on your monthly income is calculated. 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. Due to this, taxpayers will find themselves paying anywhere between 20 to 45 per cent of their bonus as a tax deduction with national insurance amounting to 2 to 12 per cent. 

FAQs: Why Is My Bonus Taxed So High 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. 

Will I get taxed more if I have 2 jobs in the UK?

Yes, you will be taxed more if you have two jobs as compared to one because your total income will rise with dual-earnings. However, your Personal Allowance will be deducted from your main income.

How Much Tax Do I Have To Pay In The UK?

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 perhaps due to the property that they own or inheritance that they may receive.

What Are Tax Codes?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year. 

References:

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

What Is A BR Tax Code? | BR Emergency Code.

Tax Code BR – Patterson Hall Chartered Accountants

What was missing from this post which could have made it better?

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.