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, it’s important to understand how bonuses are taxed.
In the UK, the government charges Income Tax and National Insurance on all earned income. This includes any bonuses you may receive. How much 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 2025/2026 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 and NI that can be due on a bonus, high earners shouldn’t underestimate the importance of proper financial planning. With a holistic strategy in place, it may be possible to reduce these tax liabilities.
| Tax band | Income | Income Tax rate | National Insurance rate |
| Basic-rate taxpayer | £12,571-£50,270 | 20% | 12% |
| Higher-rate taxpayer | £50,271-£125,140 | 40% | 2% |
| Additional-rate taxpayer | £125,140+ | 45% | 2% |
*England, NI and Wales
How to reduce tax on bonus payments
Consider making a ‘bonus sacrifice’
A commonly used strategy to manage the tax impact of a bonus is through a ‘bonus sacrifice’ arrangement. This involves requesting that your employer pay all or part of your bonus directly into your pension scheme instead of receiving it as cash. When implemented correctly, and within your available pension allowances, this could reduce your liability for Income Tax and National Insurance on the bonus.
Arranging a bonus sacrifice is usually quite straightforward. Typically, you would need to inform your employer of your intention ahead of the bonus being paid. It’s also possible to sacrifice only part of your bonus if you would prefer to retain some of the funds as immediate income.
It is important to understand that the potential tax advantages of this strategy depend on staying within your contribution limits.
Now, with this strategy, bonuses will only be tax-free if the rest of your year’s total 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 annual allowances. For example, if you earn over £260,000, 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). Your partner could also consider making use of their available allowance.
Given the complex nature of pension allowances, it is always worth consulting with a financial planner before organising a bonus sacrifice.
Invest in a Venture Capital Trust (VCT) or Enterprise Investment Scheme
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.
While investing in a VCT won’t directly reduce the tax on your bonus, you may be eligible for 30% Income Tax relief on the amount you invest – up to £200,000 per tax year, provided you hold the shares for at least 5 years. You can claim tax relief as soon as you receive your VCT certificate, but the relief only applies to the tax year when you make the investment—there’s no need to wait until the end of the tax year to submit your claim.
Similarly, you could use the Enterprise Investment Scheme (EIS) to claim 30% Income Tax relief. The scheme supports early-stage companies that are not listed on a stock exchange by encouraging individuals to invest in them.
VCTs and EIS investments are considered complex, high-risk, and the shares may be hard to sell. They are only suitable for experienced investors who have a high tolerance for risk and have maximised other available allowances. Professional advice is essential before investing, to understand all advantages and disadvantages.
Get your money into a tax-efficient environment
You should consider placing as much of your after-tax bonus as possible into tax-efficient structures, where appropriate. This means taking advantage of pension and ISA allowances. If you have already used your own allowances, you and your partner may want to take 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. A life insurance company sets up an offshore bond as a wrapper and chooses to domicile it 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.
This strategy does not make the investment tax-free, as tax may still be due upon surrender or death. Offshore bonds are complex, and their suitability depends on your personal tax status and investment goals.
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, get in touch with us today.
Regulatory Information
- 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