How is tax paid on an Annual Bonus?

I work for a company with an annual bonus scheme (linked to company profits), do I have to pay tax on this money the same as my salary and could it affect my tax band?

My main concern is that I’m at the top of the 20% band and the bonus could take me over the limit into 40% (which means I’d have to pay twice as much tax on the company car) which could mean that if the bonus is less than the extra company car tax I’d be out of pocket is this right?

Thanks.

yes*

* i think.

Balls! Thanks Harry 🙁

HTS spider is correct. You pay tax as normal on bonuses.

BTW given the current economic climate I wouldn’t complain about getting paid a bonus – you’ll get flamed.

Anyone care to explain the Month One principle? I really can’t be bothered here, it gets a bit complicated. May be worth a google search JEng, especially as it’s only August, bit less of an issue come Feb/March time

BTW given the current economic climate I wouldn’t complain about getting paid a bonus – you’ll get flamed

Sorry, I’m not complaining and I really appreciate how lucky I am to not only be working, but to be working for a company who are still turning a decent profit and who are treating us employees well. I just wanted to know how it all works. I’m also not complaining about paying tax, but I do want to try to avoid being paid less due to a bonus!

Tell your manager you would rather not get the bonus then – explain why, I’m sure they will either find a way to make a more tax efficient payment to you or split it amongst themselves.

40% tax is currently paid on salaries between £35,001-£150,000.

My understanding (happens to me) is you will will pay 40% tax on the monthly salary paid that includes the bonus if it is greater than £2916.75

Your payroll department knows the thresholds and every month multiples your monthly salary by 12 to see what your annual earnings would be were they to continue at that level.

If in subsequent months your wage reverts to less than £2916.75 your tax will revert to 20%.

In April the tax office will do a retrospective review on the end of year total and make adjustments for any over/underpayment.

Not quite as easy as that. Your taxable pay (Gross salary less tax allowance divided by 12 months) is compared against an accumulated tax pay table for a given tax code and your tax is calculated from this. You may end paying a lot of tax in the month you get the bonus but the tax will fall again in later months. By the tax year end you will have paid tax at 40% on your earnings above £42,475.01 (or £35,000.01 plus tax allowance of £7475). Your benefit in kind on the car reduces your tax code meaning that you pay tax sooner.
Andrewh, week one basis means that you are taxed using the week one on the taxable pay chart. You are normally given this code when you start at new employer part way through a tax year. It normally doesn’t effect the amount of tax you will pay but you can always check it with an online calculator at the end of the tax year and claim back any tax. Anyone on a BR tax code should always check there tax.

Capitol bonds aren’t taxable I beleive??

Only if your taxable income including the interest on the bond is less than your tax allowance. The interest is normally gross which confuses people into thinking it is tax free.

At the end of the day, whatever tax you pay, your bonus isn’t going to make you worse off, is it?

If I was in your situation I’d do my sums and increase my company pension contributions (as these are deducted before tax, effectively increasing your personal allowance) to keep me in the 20% tax band.

You wouldn’t see the bonus immediately, but you wouldn’t be worse off, and the tax man wouldn’t get his mitts on it immediately.

Cheers, Rich

If I was in your situation I’d do my sums and increase my company pension contributions (as these are deducted before tax, effectively increasing your personal allowance) to keep me in the 20% tax band.

You wouldn’t see the bonus immediately, but you wouldn’t be worse off, and the tax man wouldn’t get his mitts on it immediately.

I think we have the option to have bonuses paid directly to our pension. May be worth the OP looking into this depending on a whole host of things inc. his current pension position.

Your tax code, which is determined by your car, isn’t going to change if you get a bonus, so it’s irrelevant. You won’t be any worse off, you’ll just pay 40% on the portion of your bonus which is over the threshold, and the following month it’ll return to normal.

40% tax is currently paid on salaries between £35,001-£150,000.

As Craigxxl has pointed out that’s not right, which I’m pleased about or I’d be getting in hell of a tax bill for the last few years.

Wallop has it to you’ll pay 40% on anything that put you into the threshold. I’ve worked an unusual amount, for me, of overtime this year particular recently to do some teaching at work which is likely to put me over the threshold. I’m waiting to see what happens but I suspect my tax code will be adjusted next year to cover it but I’ll have to wait and see. If I get a a bill I’m ****.

So, just to be clear, you will NOT pay twice as much company car tax if you get a bonus.

It’s BECAUSE you have a company car that you might pay extra tax on your bonus, if it tips you into the higher rate bracket.

Goddit?

If you’re getting paid through the PAYE scheme i.e. an employee then your tax should be correct at the end of the year despite how much overtime you’ve worked as it designed to adopt to changing wages if your employer is operating the payroll correctly. Most people who are getting tax bills from HMRC for underpayment in previous years is due to them issuing the wrong tax code in the first place.
Anyone who is isn’t on the standard tax code of 747L should have been sent a breakdown of the adjustment to their tax allowance by HMRC. If you’re payslip shows a different tax code contact HMRC and ask for a breakdown if you’ve not received one. If your code is lower than 747 it means your tax allowance has been reduced to allow for benefits in kind i.e. company cars, health insurance or underpayments of tax in previous years or in rare cases split between two employers or pensions. If it’s higher than 747 you have been given extra tax allowance for overpayment in previous year, age related or other additional allowance. Again if yours isn’t a standard tax code then you should have been given a breakdown so you can check that you are receiving what your entitled to. Anyone with a K tax code means that your deductions from your tax allowance have created negative allowance meaning that you need to pay additional tax to cover your full income including benefits in kind normally caused by high value or high CO2 company cars.

I wish i got paid a bonus..

I get a monthly rate. That is it.

No overtime
No bonus
and no company car..

But the pension scheme is pretty good alongside the other benefits 😀