UK Bonus + One-Off Payment Tax Optimisation 2026/27

Q Why does my bonus look like it is taxed at a higher rate than my salary?

There is no special bonus tax rate: a bonus is employment income taxed at your normal rates. Two things make it look higher. First, Income Tax is worked out on the cumulative basis (Income Tax (PAYE) Regulations 2003, reg 23): each payday, tax is calculated on your total pay so far in the tax year against the share of the year's allowance and bands available by that date. A large bonus in one month can use up the year-to-date basic-rate band, so more of it is taxed at 40% that month; if your pay is otherwise steady, later months use the bands that build up and tax settles to the right annual figure. Second, employee National Insurance is worked out per pay period and is not reconciled at year end, so a bonus month that goes above the monthly Upper Earnings Limit pays 2% on the excess. Above £100,000 of adjusted net income the Personal Allowance is withdrawn at £1 for every £2, which makes the marginal Income Tax rate 60% until it is gone: that one is real, not a timing effect.

Q How does bonus sacrifice into a pension work?

You agree with your employer to give up some or all of the bonus in return for an employer pension contribution of the same amount. For it to work, the right to the cash must be given up before you are entitled to it: HMRC says the contract must be varied before the earnings are treated as received (EIM42765). The sacrificed amount bears no Income Tax or employee NI and your employer saves employer NI at 15%, which some employers add to the pension. Example: on a £60,000 salary, a £20,000 bonus taken as cash loses £8,400 to tax and NI, leaving £11,600; sacrificed, the full £20,000 goes to the pension and the employer saves £3,000. Employer contributions count towards the £60,000 Annual Allowance. From April 2029 the NI exemption for salary-sacrificed pension contributions is capped at £2,000 a year (HM Treasury, Budget 2025).

Q When does sacrificing a bonus make most sense?

The relief is worth most where the bonus would otherwise be taxed at a high marginal rate: higher or additional rate, and especially adjusted net income between £100,000 and the point where the Personal Allowance is gone. Example: a £90,000 earner taking a £30,000 bonus in cash keeps £13,400 (55.3% lost to tax and NI, because the bonus takes income to £120,000 and removes £10,000 of Personal Allowance). Sacrificing £20,000 and taking £10,000 in cash keeps £5,800 in hand, puts £20,000 in the pension, and saves £12,400 of tax and NI compared with all cash. Cash makes more sense if you need the money before you can access a pension (normally age 55, rising to 57 from 6 April 2028), or if you have no Annual Allowance left.

Q What are the Annual Allowance limits on sacrificing a bonus?

The standard Annual Allowance is £60,000 a year for all contributions, including employer ones. If you use all of it, you may carry forward unused allowance from the previous 3 tax years. It is tapered only if both your threshold income is over £200,000 and your adjusted income is over £260,000, and cannot fall below £10,000. If you have flexibly accessed a pension, the money purchase annual allowance of £10,000 applies to defined contribution savings. Tax relief on your own contributions is limited to 100% of your annual earnings.

Q Can I move my bonus into a different tax year?

Only by changing when you become entitled to it, not just when it is paid. Money earnings are treated as received at the earliest of when they are paid and when you become entitled to payment (ITEPA 2003 s.18, Rules 1 and 2); for directors, earlier times can also apply, such as when the bonus is credited in the company's records (Rule 3). So if you are already entitled to a bonus in March, delaying payment to April does not move it into the next tax year. A deferral has to be agreed before entitlement arises, which normally needs the employer's agreement and the scheme rules to allow it. Bonuses that vest over several years under the scheme rules are taxed as each part is received.

Q Can I carry back a pension contribution to the previous tax year?

No. Pension tax relief is given for the tax year in which the contribution is paid. What you can do is carry forward unused Annual Allowance from the previous 3 tax years into the current one, once the current year's allowance is used. Some other reliefs can be carried back: Gift Aid donations can be treated as made in the previous tax year if you elect by the time you file that year's return (ITA 2007 s.426), and EIS and SEIS subscriptions can be treated as made in the previous year (ITA 2007 ss.158 and 257AB).

Q How are RSUs and other employee shares taxed?

Shares received from a non-tax-advantaged scheme, such as restricted stock units, are taxed as employment income on their market value when you receive them. Your employer may deduct Income Tax and NI through payroll; if it does not, you report them through Self Assessment. Tax-advantaged schemes (Share Incentive Plans, SAYE, Company Share Option Plans and Enterprise Management Incentives) can avoid Income Tax and NI if their conditions are met; for example, no charge arises when an EMI option to buy shares at not less than their market value is exercised (ITEPA 2003 s.530). A large vest counts towards the £100,000 Personal Allowance taper like a cash bonus.

Q Does a bonus affect Child Benefit or Tax-Free Childcare?

Yes. The High Income Child Benefit Charge is 1% of Child Benefit for every £200 of adjusted net income over £60,000, and all of it above £80,000. Example: a £50,000 salary plus a £20,000 bonus gives £70,000; with two children (£2,337 of Child Benefit a year at 2026/27 rates) the charge is £1,168. Tax-Free Childcare (up to £2,000 per child a year) is lost if either parent's expected adjusted net income is over £100,000. A pension sacrifice reduces adjusted net income: a £85,000 earner with a £20,000 bonus who sacrifices £5,000 stays at £100,000, keeps Tax-Free Childcare eligibility and the full Personal Allowance, and gives up only £1,900 of take-home pay for the £5,000 pension contribution. The sacrifice must be agreed before the bonus is due.

Q What about one-off payments other than bonuses?

Termination payments: the first £30,000 of a qualifying payment is free of Income Tax (ITEPA 2003 s.403); the excess is taxed. Pay in lieu of notice and post-employment notice pay are taxed as earnings (s.402B). See the redundancy guide. Pension lump sums: you can usually take up to 25% tax-free, up to the £268,275 lump sum allowance. Winnings: betting and lottery winnings are not chargeable gains (TCGA 1992 s.51(1)) and betting is not normally a trade (HMRC BIM22015), so they are not taxed; income they later earn is. Personal injury damages are not chargeable gains (TCGA 1992 s.51(2)).

Q Should I put my bonus into an ISA or a pension?

A pension gets tax relief on the way in and is taxed on the way out (apart from the tax-free lump sum); an ISA gets no relief going in but is tax-free coming out and can be accessed at any time. For the £60,000 earner above, £20,000 sacrificed puts £20,000 in a pension, while the same bonus as cash leaves £11,600 to put in an ISA. The ISA allowance is £20,000 a year. A Lifetime ISA (first payment before age 40, contributions until 50) takes up to £4,000 a year, counts towards the ISA allowance and gets a 25% government bonus, up to £1,000 a year. The right mix depends on when you need the money.

Q What if I have to repay a bonus?

In HMRC v Martin [2014] UKUT 0429 (TCC) an employee who repaid part of a signing bonus after resigning early was still taxable on the whole bonus in the year he received it. The Upper Tribunal held that the repayment, made in a later year, gave him an employment loss in the year of repayment, which he could set against his total income under what is now ITA 2007 s.128. That relief can be claimed for the year of the loss, the previous year, or both, by the first anniversary of the Self Assessment filing deadline for the loss year. Outcomes depend on the contract terms, so take advice on any significant clawback.

Q What should I check before the end of the tax year?

(1) Whether your adjusted net income will cross £60,000 (Child Benefit) or £100,000 (Personal Allowance and Tax-Free Childcare), and whether a pension contribution or sacrifice agreed in time would bring it back. (2) Your pension contributions against the £60,000 Annual Allowance and any carry-forward. (3) Whether you will use your £20,000 ISA allowance, which cannot be carried forward. (4) Gift Aid: donations can be treated as made in the previous tax year by election when you file that year's return (ITA 2007 s.426). (5) Your tax code and payslips, in case the bonus month was deducted on an emergency or non-cumulative code. The Self Assessment deadline for 2026/27 is 31 January 2028.