By the time a bonus shows up on your payslip, most of the decisions about it have already been made. The tax is fixed by your income for the year, any student loan deduction is fixed by the month it's paid in, and the cheapest option, swapping it for a pension contribution, usually has to be agreed before you are entitled to the money. This guide covers what to think about while there is still time to choose.
What you actually keep
There is no special rate of tax on a bonus. It is added to your salary and taxed at whatever rate applies to the top slice of your income. That makes the answer depend almost entirely on where the bonus lands. Take Priya, who earns £45,000 and is offered a £8,000 bonus. The first £5,270 of it fits under the £50,270 higher-rate threshold, where she keeps 72p in the pound after 20% tax and 8% National Insurance. The remaining £2,730 is taxed at 40% with 2% National Insurance, so she keeps 58p. Overall she takes home about £5,378 of the £8,000. If she also repays a Plan 2 student loan, that drops to about £4,658, because the loan takes another 9% of the whole bonus.
The calculator above works out the same split for your own salary, and shows why the payslip in the bonus month can look far worse than the annual figure.
Why student loan deductions spike
Income tax under PAYE is cumulative: it looks at your earnings for the year to date, so an over-deduction in a bonus month is corrected in later months. Student loan deductions don't work that way. They are worked out separately for each pay period against that period's share of the threshold. For a Plan 2 borrower paid monthly, that is roughly £2,449 a month. In a month where a bonus lifts your pay well above that figure, the loan takes 9% of everything over it, even if your income for the whole year ends up below the annual threshold.
If that happens, the deduction isn't lost. Once the tax year has ended and your total income is confirmed, you can ask the Student Loans Company to refund anything taken when your annual income was below the threshold. It is a cash-flow problem rather than a cost, but worth knowing about before you plan to spend the bonus.
Bonus sacrifice: the cheapest way to take it
Many employers let you exchange some or all of a bonus for an employer pension contribution. The money goes into your pension before income tax and National Insurance, so a basic-rate taxpayer keeps the full value instead of 72p in the pound, and a higher-rate taxpayer keeps it instead of 58p. Some employers also add part of the 15% employer National Insurance they save.
The catch is timing. HMRC only accepts a sacrifice if it is agreed before you become entitled to the bonus. Once the bonus is contractually yours, swapping it for pension is no longer a sacrifice, and normal tax applies. In practice that means making the choice when your employer asks, often weeks before payday, rather than after you see the figure on your payslip.
For Priya, sacrificing the whole £8,000 means her take-home pay for the year is exactly what it would have been with no bonus at all, while £8,000 goes into her pension. Taking it as cash leaves her about £5,378. The question is simply whether she would rather have £5,378 now or £8,000 locked away until at least 57.
Thresholds a bonus can cross
Three thresholds deserve a check before a bonus is paid. At £60,000 of adjusted net income the High Income Child Benefit Charge starts to claw back Child Benefit. At £100,000 your Personal Allowance starts to disappear, producing a 60% effective rate, and if you have young children, Tax-Free Childcare and funded hours are lost entirely. A bonus that pushes you across one of these can cost much more than the headline tax suggests, and a partial sacrifice that keeps you below the line is often the best value of all.
Before you decide
Run your salary and bonus through the calculator above to see your real keep-rate. If you are near £100,000, the £100k tax trap calculator shows the sacrifice that brings you back under the threshold. For a fuller comparison of cash against pension, the salary sacrifice calculator shows the tax and National Insurance saved on each pound.