How bonuses are taxed

A bonus is pay. It goes through PAYE in the month it is paid and is taxed at your usual rates, with National Insurance and any student loan deduction on top. There is no separate bonus tax. PAYE usually looks at your pay for the whole tax year so far, so a bonus month that seems heavily taxed is normally balanced out in later months. National Insurance is not balanced out, but it can work in your favour.

Which payments count as a bonus

In the public sector, bonuses tend to be small and occasional. Payments taxed the same way include:

• Civil Service in-year reward payments and end-of-year performance awards
• recruitment and retention premiums, often paid in a lump sum when you start or after a set time
• golden hellos and “refer a friend” payments
• one-off non-consolidated payments agreed as part of a pay deal
• back pay when a pay award is applied late
• additional responsibility or acting-up payments paid as lump sums

All of these go through payroll with tax and NI deducted. Our page on market supplements and recruitment premiums covers how they are used.

How PAYE taxes a bonus

Payroll adds the bonus to your normal pay for that period. With a normal code such as 1257L, it then works cumulatively. It adds up all your pay since 6 April, compares that with a share of the Personal Allowance and of the basic rate band for the same number of months, and takes tax to bring you up to date.

Say you earn £40,000 in England and get a £3,000 bonus in September, the sixth month of the tax year. By then you have had six twelfths of the allowance, £6,285, and six twelfths of the £37,700 basic rate band, £18,850. Your pay to date is £23,000, so your taxable pay to date is £16,715. That is inside the basic rate band, so the bonus is taxed at 20 per cent: £600.

Why a bonus early in the year can look over-taxed

Now say the same £3,000 is paid in April, the first month. Only one twelfth of the basic rate band is available, about £3,142. Pay that month is £6,333, so a chunk of the bonus is taxed at 40 per cent. The tax for April comes to about £1,486, against about £457 in a normal month. The bonus seems to have lost over a third to tax.

Over the year it has not. In May and June, cumulative pay is still above the share of the basic rate band, so tax continues at a slightly higher level. By the fourth month, cumulative pay falls back inside the band and the extra tax is given back through the payslip. If your total income for the year stays under £50,270, you end up paying 20 per cent on the bonus, as you would on any pay.

This only works with a cumulative code. If your code ends in W1, M1 or X, each period is taxed on its own, and the overpayment is not given back until HMRC reviews your year. Our page on emergency tax codes explains how to spot one.

National Insurance on a bonus

National Insurance is worked out on each pay period by itself and is never corrected later. Employee NI is 8 per cent on monthly pay between £1,048 and £4,189, and 2 per cent above £4,189.

For the £40,000 earner, monthly pay of about £3,333 is under £4,189. The £3,000 bonus takes that month to about £6,333. Only the first £856 of the bonus is charged at 8 per cent and the remaining £2,144 at 2 per cent. NI on the bonus is about £111, compared with £240 if it had been spread through the year. A single large payment usually means less NI, not more.

Student loans and pension

Student loan repayments are worked out per pay period too, at 9 per cent of pay above the monthly threshold for your plan (6 per cent for a Postgraduate Loan). They are not refunded later just because the bonus was a one-off, though the total you owe falls by the same amount.

Whether a bonus is pensionable depends on your scheme and the type of payment. Back pay usually is. Non-consolidated awards and recruitment premiums often are not. Where pension is taken, public sector schemes deduct it before tax. Your payslip shows which lines had pension deducted; see how to read your payslip.

Bonuses that push you over a threshold

A bonus can tip your annual income over a line where something else changes:

• £50,270, or £43,662 in Scotland, where the higher rate starts
• £60,000 of adjusted net income, where the High Income Child Benefit Charge begins
• £100,000, where the Personal Allowance starts to be withdrawn and childcare support stops

In these cases the extra cost is real and has nothing to do with payroll timing. The overtime tax guide has more on how extra pay near these lines is treated. To see what a bonus means for your monthly pay, put your salary including the bonus into the take-home pay calculator. If tax on a bonus still looks too high a few months later, check your tax code and ask your payroll team which code was used.