Earning a healthy bonus should be celebrated. However, it can be a bit of a double-edged sword. On one hand, you’ve been rewarded financially for all your hard work. On the other hand, you’re facing a chunky tax bill, and this might be larger than you expected.
The good news is that, with efficient tax planning, you can potentially reduce taxes on bonuses, or reclaim tax that you have already paid. With that in mind, here’s a look at some strategies that can help you keep more of your hard-earned money.
How are bonuses taxed in the UK?
Before we look at bonus tax minimisation strategies, let’s first look at how bonuses are taxed.
In the UK, Tax and National Insurance is applied to all earned income. This includes any bonuses you may receive. How much Income Tax and National Insurance you pay on your bonus will depend on your NI category and tax band. If you’re already a higher-rate taxpayer, you’re likely looking at 40% Income Tax (additional-rate taxpayer 45%) plus 2% National Insurance, on the bonus payment *
The takeaway here is that high earners can potentially face considerable bonus tax liabilities. For example, if your annual income is £300,000 (in the 2023/2024 tax year) and you receive a bonus of £100,000, you will owe Income Tax and National Insurance of approximately  £47,000 on the bonus. Given the amount of tax that can be due on a bonus, high earners shouldn’t underestimate the importance of proper financial planning. With a holistic strategy in place, one can potentially reduce their tax liabilities significantly.
| Tax band | Income | Income Tax rate on bonus | National Insurance rate on bonus |
| Basic-rate taxpayer | £12,571-£50,270 | 20% | 12% |
| Higher-rate taxpayer | £50,271-£150,000 | 40% | 2% |
| Additional-rate taxpayer | £150,000+ | 45% | 2% |
*England, NI and Wales
How to reduce tax on bonus payments
Make a ‘bonus sacrifice’
One of the most effective ways of reducing tax on a bonus is to set up a ‘bonus sacrifice’. With a bonus sacrifice, your bonus is paid directly into your pension instead of being paid into your bank account. You then don’t have to pay any Income Tax or National Insurance on it. Arranging a bonus sacrifice is usually quite straightforward. Typically, all you need to do is tell your employer that you want your bonus paid into your pension. Note that you don’t have to sacrifice all of your bonus. If you wanted access to some of the money now, you could take a portion in cash and sacrifice the rest.
Now, with this strategy, bonuses will only be tax-free if the rest of the year’s pension contributions are under the annual pension contribution limit. This is usually £60,000 per year or 100% of your salary – whichever is lower. However, those on high incomes face tapered allowances. For example, if you earn over £360,000, you are potentially looking at a pension allowance of just £10,000. You may be able to contribute more than the annual limit though by taking advantage of pension ‘carry forward’ rules (making use of any unused allowances from previous years). You could also consider making use of your partner’s available allowance. Given the complex nature of pension allowances and pensions in general, it is always worth consulting with a financial advisor before organising a bonus sacrifice.
Invest in a Venture Capital Trust (VCT) or Enterprise Investment SchemeÂ
Another strategy that can potentially help you get more out of your bonus is making an investment into a Venture Capital Trust (VCT). VCTs are investment companies that are listed on the London Stock Exchange and invest in smaller companies that meet certain criteria. Investing in a VCT won’t reduce the tax on your bonus. However, you will be eligible for 30% Income Tax relief on the amount you invest. So, for example, if you received an after-tax bonus of £100,000 and invested the capital into a VCT, you could potentially receive £30,000 in Income Tax relief (this can be claimed as soon as you receive your VCT certificate rather than having to wait until the end of the tax year). Similarly, the Enterprise Investment Scheme (EIS) can be used to obtain 30% Income Tax relief. This is a scheme designed to encourage investment into early-stage companies that are not listed on a stock exchange. Note, however, that VCTs and the EIS are higher-risk investment schemes. They are really only suitable for sophisticated investors and/or those who have maximised their other allowances.
Get your money into a tax-efficient environment
It goes without saying that you should try to get as much of your after-tax bonus as possible into tax-efficient structures. This means taking advantage of pension and ISA allowances. If you have already used your own allowances, consider taking advantage of those of your partner and/or children (the Junior ISA has an annual allowance of £9,000).
High earners may also want to consider the use of offshore bonds. An offshore bond is a wrapper set up by a life insurance company and domiciled in a jurisdiction with a favourable tax regime, such as the Isle of Man, Guernsey, or Luxembourg. With these investments, you can take up to 5% of your initial investment as a tax-free investment every year for 20 years and defer paying tax until a later date.
The role of financial planning in reducing tax on bonus payments
It’s worth stressing that the best way to get the most out of your bonus is to speak to a financial adviser and put a holistic financial plan in place. A financial adviser can potentially help you optimise your overall tax strategy. They can also help with advice on how to invest a lump sum and how to invest for retirement.
At Bowmore, we have decades of experience helping high earners reduce tax on bonus payments. We understand the tax challenges you face, and we can help you navigate them.
To find out more about how we can help you with tax strategies, contact us on enquiries@bowmorefp.com or call us on 01275 462469.
Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
- Bowmore Financial Planning Ltd is not regulated to provide tax advice
- The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance
- The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future
