There is no such thing as bonus tax. A bonus is ordinary employment income, taxed through PAYE exactly like salary — which is why the explanation employees usually get ("bonuses are taxed at a higher rate") is wrong, and why the payslip that prompted the question usually still looks wrong to them. The distortion comes from how PAYE and National Insurance work across a month, not from a separate rate.
Why the payslip looks punitive
Two mechanisms produce the shock. The first is the way PAYE works. Under a normal cumulative code, each month gives the employee a further 1/12 of their allowances and 1/12 of each rate band; the payroll works out the tax due on pay to date and deducts the difference between that and the tax already taken. A large bonus pushes pay to date past the cumulative bands available so far, so most of it is taxed at the higher rate in the month it is paid even where the employee's income for the whole year will not reach that band. The cumulative calculation unwinds the over-deduction across the remaining months, but the correction is invisible and the over-deduction is not. A week 1 / month 1 code behaves differently and worse: it ignores pay to date entirely, taxes each month in isolation, and makes no refund at all — so any over-deduction waits for the tax return.
The second is National Insurance, and this one does not correct itself. Employee National Insurance is charged at 8% on earnings between the primary threshold and the upper earnings limit of £50,270 a year, and at 2% above it — assessed per pay period, not annually. Paying a year's bonus in one month pushes most of it above the monthly equivalent of the upper earnings limit, where it attracts only 2%. Counter-intuitively, the lump sum is often better for National Insurance than the same money spread across twelve months. The employer, meanwhile, pays 15% on everything above £5,000 a year with no upper limit at all, so a bonus costs the business 15% on top of the headline figure.
The band that genuinely does cost 60%
There is one place where a bonus is taxed at a punitive marginal rate, and it is worth planning around. The personal allowance of £12,570 is withdrawn by £1 for every £2 of adjusted net income above £100,000, disappearing entirely at £125,140. Inside that £25,140 band, each extra pound of income is taxed at 40% and also removes 50p of allowance that would otherwise have been untaxed — an effective marginal rate of 60%, plus 2% National Insurance.
An employee on £95,000 receiving a £30,000 bonus therefore pays a genuinely higher rate on the slice between £100,000 and £125,140 than they would at the 45% additional rate above it. The same band quietly removes access to tax-free childcare and the free childcare hours, which for a household with young children can be worth more than the tax itself. Families receiving child benefit face a parallel taper through the high income child benefit charge. These are the cases where a conversation before the bonus is paid is worth having.
What actually reduces the bill
Most "bonus tax planning" is not planning at all — but three routes are real:
- Bonus sacrifice into a pension. Giving up the bonus before entitlement arises, in exchange for an employer pension contribution, removes income tax and employee National Insurance on the sacrificed amount and saves the employer 15% as well — savings many employers pass back into the contribution. For income in the 60% band it is the single most efficient step available. The arrangement must be documented before entitlement to the bonus arises; sacrificing a bonus already earned does not work;
- Timing across tax years. Where a bonus straddles a boundary — a promotion, a year of maternity leave, a year with large dividends or other taxable income — moving payment into a year with headroom below £100,000 changes the marginal rate materially. A capital gain is not part of this calculation: chargeable gains are charged under the capital gains rules and do not enter adjusted net income, so they never trigger the personal allowance taper. Chargeable event gains on life policies, which sound capital but are taxed as income, do. The employer must genuinely defer entitlement, not just the payment date;
- Charitable giving through payroll or gift aid, which reduces adjusted net income and can lift an employee back out of the taper.
Note the pension annual allowance constraints: the standard allowance is £60,000, and it tapers for high earners, so a very large sacrifice needs the taper and any carry-forward from the previous three years checked before it is committed.
Shares, deferral and the alternatives
Employers reaching for something other than cash should understand what they are choosing. Shares awarded outright are taxed as employment income on their market value, with National Insurance too if they are readily convertible assets — so a share award is not a tax saving, merely a different asset. Tax-advantaged plans are: an EMI option granted at market value produces no charge on grant or exercise and capital gains treatment on sale; a Share Incentive Plan can deliver shares free of income tax and National Insurance where the holding periods are met. These change the tax outcome; a plain "bonus in shares" does not.
Deferred cash bonuses, common in regulated firms, remain fully taxable when paid. Deferral changes the year, not the treatment, and the employee carries the risk of forfeiture in the meantime.
Getting the payroll mechanics right
For the employer, the operational points are narrow but unforgiving. A bonus is Class 1 National Insurance, not Class 1A — it goes through payroll, not the P11D. Bonuses paid after someone leaves and after the P45 has been issued must be taxed on code 0T week 1/month 1, which usually over-deducts and irritates the recipient unless warned. Contractual bonuses create an accrual and a corporation tax timing question: a bonus accrued in the accounts is deductible only if paid within nine months of the period end. And salary sacrifice arrangements need documentation dated before entitlement, not a retrospective note.
For the employee, the honest summary is this: the money is taxed at your normal marginal rate, the payslip probably over-deducted, and it will come back through the cumulative calculation or the tax return. The only genuinely high rate in the system is the 60% band — and that one is worth acting on before the payment date rather than complaining about afterwards.
Acumon handles bonus and incentive planning through employment tax advice and payroll management, including sacrifice documentation and share plan design. If a material bonus is due this year to someone earning near £100,000, that is the conversation to have this month.