The bonus you will get is considered your earnings so you will be taxed in the same way as your income.
You will pay income tax and National insurance on your bonus in addition to that any student loans will also be deducted.
Look at this example below:
Mr J has an annual income of £100 000 (which is his base salary) and he received a bonus of £10 000 in a particular year. How much tax and NI will he pay?
Income Tax on base salary
| Annual income | £100 000 |
| Personal Allowance(2022/2023) | (£ 12 570) |
| Taxable income | £ 87 430 |
| Tax payable at (40%) | £ 34 972 |
As you can see above Mr J as he is earning £100 000 he is a higher rate taxpayer and therefore the bonus he will earn will also be taxed at 40%
Income tax on bonus
| Bonus for the year | £ 10 000 |
| Tax payable | £ 4000 |
| Bonus after income tax | £ 6000 |
National Insurance on bonus
| Bonus for the year | £10000 |
| National Insurance (after April 2022 is 3.25%) | £325 |
| Bonus after deducting NI | £9675 |
If we add Mr J`s bonus for the year to the base salary the total income for the year will cross the £100 000 threshold. This means that there will be a reduction in the personal allowance,
The HMRC rule is that your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100 000. This means your allowance is 0 if your income is £125 140 or above.
In the above example Mr J will have to pay an extra income tax on £5000 because of the reduction in his personal allowance due to his income being £10 000 above £100 000. As a result he will be paying extra tax of £2000 (40% of 5000)
Look at the summary of the taxes you will be paying on your bonus:
£
| Income tax on the bonus | 4000 |
| National Insurance | 325 |
| Extra tax due to reduction in NI | 2000 |
| Total Deductions | 6325 |
If you get a bonus of £10 000 or more and you are a higher rate tax payer you will be bringing home only £3 675 as cash, paying more than half of your hard work to the treasury.
However, if you are a basic tax rate payer (earning between £12 571 to £50 270)and after getting the bonus you stay in the same band you will be paying tax on the bonus at 20% and you will be able to use your personal allowance fully.
If you are Basic Tax rate Payer
For example if you are a basic tax rate payer earning £40 000 and you get a bonus of £10 000 in a particular year you will pay income tax of £2000 on the bonus and NI will be £1350 £3350 so your take home bonus will be £6650 .
How to save taxes on your bonus?
So Tax is a complex topic and how much you pay depends on your individual circumstances. One way to save taxes on your bonus is to put it in your pension pot. Although you will be saving money as you won’t have to pay taxes, you will not be getting any cash in hand until you reach your retirement age.
If you want to know more about taxes contact Taxaccolega here or call us at 020 8127 0728 and our expert team of accountants will be happy to help you by discussing the tax reliefs available to you and can also help in filling your self assessment and offer information on our annual accounts service. We also have a helpful article explaining the change in the income tax additional rate threshold for you to look at!
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