A bonus is taxed as ordinary earnings through PAYE in the pay period it is paid, so the payslip often shows a bigger deduction than you expect because only one month’s share of your tax bands is available that month. On a normal cumulative tax code the overpayment is clawed back in the following months, so by the end of the tax year you pay the right amount. National Insurance is different: for most employees it is worked out period by period and is not corrected later.

When is a bonus taxed?

A bonus is general earnings under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Section 18 ITEPA treats money earnings as received at the earliest of the time payment is made and the time the employee becomes entitled to payment. That date fixes the tax year in which the bonus is taxed, and the employer must operate PAYE on it at that point.

For directors, section 18 adds a third rule: earnings are also treated as received when they are credited in the company’s accounts or records (even if the director cannot draw them yet), or when the amount for a period is determined. A director’s bonus voted at a board meeting or credited to a director’s loan account is therefore taxable at that point, not when the cash eventually leaves the bank. HMRC’s employer guide CWG2 applies the same tests for deciding when PAYE must be operated on a director’s pay.

Why does my bonus payslip look over taxed?

Most employees have a tax code that is operated on a cumulative basis. HMRC’s guidance explains that tax is usually worked out on your total income so far in the tax year. Payroll gives you a twelfth of your Personal Allowance and a twelfth of each tax band for every month that has passed. In the month a bonus is paid, your pay to date jumps but your bands to date only move on by one month, so part of the bonus may be taxed at 40% even though your income for the whole year will stay within the basic rate band.

The deduction is not wrong. It reflects the fact that payroll cannot know what you will earn for the rest of the year. If you are on an emergency code ending in W1, M1 or X (or marked NONCUM), each period is taxed in isolation, as if you were paid that amount every period, and the excess is not automatically recovered through payroll. You can read more about suffixes in our guide to PAYE tax codes.

How does cumulative PAYE put it right?

Because each month’s tax is the tax due on pay to date minus tax already deducted, a large deduction in the bonus month is followed by smaller deductions until the cumulative position catches up. The 2026 to 2027 rates for England, Wales and Northern Ireland are a £12,570 Personal Allowance, 20% basic rate up to £50,270, 40% higher rate up to £125,140 and 45% above that. Scottish taxpayers have different bands.

Illustration only. Sam earns £36,000 a year, paid £3,000 monthly, on code 1257L. In month 3 Sam receives a £6,000 bonus. Ignoring the small rounding in HMRC’s tax tables:

  • Months 1 and 2: tax of about £390.50 each month.
  • Month 3: pay to date is £15,000, free pay to date about £3,142.50 and the basic rate band to date £9,425. Tax to date is about £2,858, so month 3 deduction is about £2,077. Had the whole £9,000 been taxed at 20% the deduction would have been about £1,590.50.
  • Months 4 and 5: as the bands to date catch up, deductions fall to about £152.67 each.
  • Month 6 onwards: back to normal, and total tax for the year is £5,886, which is exactly 20% of Sam’s £29,430 taxable income.

Sam never paid higher rate tax; the extra deducted in month 3 was simply collected early and returned through lower deductions. If Sam leaves before the catch up happens, the new employer continues the cumulative calculation using the P45 figures, or Sam can claim back any overpayment, see claiming tax back after leaving a job.

What about National Insurance on a bonus?

Class 1 National Insurance is not cumulative for ordinary employees. CWG2 says extra payments such as bonuses are treated as part of total pay at the time they are paid, whenever they were earned, and contributions are worked out using the earnings period (usually the pay interval). For 2026 to 2027 the monthly Primary Threshold is £1,048 and the monthly Upper Earnings Limit is £4,189; employees pay 8% between the two and 2% above, and employers pay 15% above the £417 monthly Secondary Threshold.

So a bonus that pushes a month’s pay above £4,189 attracts employee contributions mostly at 2% for that month, and nothing is reclaimed later. Directors are different. HMRC’s booklet CA44 explains that directors have an annual earnings period: contributions are calculated on total earnings to date, including fees and bonuses, and if the company pays on account monthly it must reassess on the annual basis at the last payment of the year.

How does a bonus interact with the 60% band?

Your Personal Allowance goes down by £1 for every £2 of adjusted net income above £100,000, and is nil at £125,140 or above. Between those figures each extra £1 of income costs 40p in higher rate tax plus 50p of allowance taxed at 40%, which is an effective rate of 60%, or 62% once 2% employee National Insurance is added.

Illustration only. Priya’s salary is £95,000 and she receives a £20,000 bonus, so her income is £115,000. She loses £7,500 of Personal Allowance. The £15,000 above £100,000 costs £6,000 in tax at 40%, and the lost allowance costs a further £3,000, a total of £9,000 or 60% of that slice.

Payroll usually only knows the allowance in your tax code. If your code still gives the full allowance, the taper is not collected in the bonus month and HMRC either adjusts your code or checks your tax after the year ends and writes to you, often with a P800 calculation. Our guide to Personal Allowance tapering explains the rules in more depth.

Can I reduce the tax on a bonus?

Two approaches are commonly used, both within HMRC’s published rules:

  • Personal pension contributions. HMRC’s adjusted net income guidance deducts the grossed up amount of contributions made to a scheme that gives relief at source. A contribution that brings adjusted net income back to £100,000 restores the allowance.
  • Bonus sacrifice. HMRC’s Employment Income Manual (EIM42750) confirms an employee can sacrifice a one off item such as a bonus, typically in return for an employer pension contribution. EIM42765 adds the timing condition: the right to the cash must be given up before it is treated as received. Once you are entitled to the bonus it is taxable even if you then ask for it to go elsewhere. See our guide to salary sacrifice schemes.

What mistakes do people make with bonus tax?

  • Annualising the bonus month payslip and concluding the employer is applying the wrong rate. Check the year to date tax figure instead.
  • Assuming a December or March bonus can be pushed into the next tax year after it has already been awarded. Under section 18 the earliest of payment and entitlement wins; for directors, crediting or determining the amount can also fix the date.
  • Forgetting that a bonus above £100,000 of income may not be fully taxed through PAYE, leaving a bill later in the year.
  • Agreeing a bonus sacrifice after the bonus has been declared, which HMRC treats as ineffective.
  • Expecting National Insurance overpaid in the bonus month to be refunded through payroll. For employees on a normal earnings period it is not.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.