Why Was My Bonus Taxed So Much? — UK Guide
Receiving a bonus is great — until you see what's been deducted. It often feels like you've lost 40–50% of the bonus to tax. Here's why that happens, whether it's correct, and what you can do about it.
Why Bonuses Feel More Taxed
There are two main reasons:
- Marginal rate effect: Your personal allowance and basic rate band are already partly used by your regular salary. Your bonus is added on top, so it's taxed at your highest rate — often 40% or 42% — even if your overall effective rate is much lower.
- Month 1 coding: Some employers apply a non-cumulative Month 1 code to the bonus payment, meaning they don't give credit for tax already paid this year. This causes overtaxation in that month, which is corrected automatically in subsequent months.
Bonus Tax Calculation — Worked Example
Salary: £45,000 + Bonus: £5,000 (paid in March)
- Regular monthly salary: £3,750 gross
- Bonus month gross: £3,750 + £5,000 = £8,750
- £8,750 × 12 annualised = £105,000 — this pushes into higher rate band
- Tax on bonus portion: 40% × £5,000 = £2,000 income tax
- NI on bonus: 2% × £5,000 (above UEL monthly threshold) = £100 NI
- Net bonus received: ~£2,900
Note: If earnings were below £50,270 for the full year, some of the 40% over-deduction would be corrected in subsequent months or via a year-end rebate.
Effective Tax Rates on Bonuses
| Total Income Band | Income Tax on Bonus | Employee NI on Bonus | Combined Rate |
|---|---|---|---|
| Up to £50,270 total | 20% | 8% | 28% |
| £50,271 – £125,140 | 40% | 2% | 42% |
| Over £125,140 | 45% | 2% | 47% |
Scotland uses different income tax rates — see our Scotland income tax guide.
How to Reduce Tax on a Bonus
- Pension sacrifice: Ask your employer to pay the bonus (or part of it) directly into your pension via salary sacrifice. You avoid income tax and NI entirely on that portion.
- Personal pension contribution: If paid as cash, you can contribute to a SIPP and claim higher-rate relief via Self Assessment — recovering the extra 20% if you're a higher-rate taxpayer.
- Defer if possible: If you're close to a tax band boundary, asking for a bonus to be paid in a different month or year might keep it in a lower band.
- Check your code: If you received an emergency or Month 1 code on your bonus, contact HMRC — you may be due a refund in subsequent months.