How are bonuses taxed in the UK?

Find out how HMRC taxes cash and non-cash bonuses for employees.

Are bonuses taxed
Find out how to make the most out of an employee bonus by making it tax free.

(2-minute read)

We will cover:

  • How HMRC taxes bonuses
  • What is a salary sacrifice and how it saves tax on bonuses

How are bonuses taxed in the UK?

Cash bonuses can be a great incentive to employees, and also of great benefit to employers as they increase productivity and morale.

HMRC sees cash bonuses as earnings, taxing them accordingly.

Therefore, if you’re paying a cash bonus to your employee, this is subject to tax and National Insurance Contribution (NIC).

There are, however, many non-cash bonuses that exempt you from paying tax. 

Examples of non-cash bonuses which are tax free

  • medical incentives
  • retirement contributions
  •  health savings account
  • non-financial bonuses such as
  • …flexible work hours
  • …the choice to work from home
  • …the choice in which projects they want to work on

However, not all non-cash bonuses are tax free.

A common example would be medical and dental insurance.

So if you give these as a form of a non-cash bonus to your employees, you’ll be subject to paying 13.5% on the taxable value for class 1 NICs.

You can also have a look at the specific rules for each non-cash bonus item via the HMRC website.

For employees

As mentioned previously, bonuses are treated in a similar way to your regular income, as they are taxed according to your tax bracket.

If you earn between £12,570 and £50,270, your income, including bonuses, will be taxed at 20% and make NICs at 12%.

If you earn between £50,270 and £100,000, your income, including bonuses, will be taxed at 40% and make NICs at 2%.

You can choose a more fiscally efficient option of receiving your bonus by asking your employer to deposit it into your pension.

This is a salary sacrifice.

This way, you can receive your bonus free of tax or National Insurance.

Employees can choose to make a salary sacrifice partially or in full.

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