How to maximise your bonus

Before we look at your options, here is a quick reminder of how bonuses are generally taxed in the UK.

If you receive a salary and are subject to PAYE tax, a bonus is usually treated as income and is taxed at your marginal rate. When a bonus pushes you into a higher tax band, the extra amount in that band will be taxed at the higher rate.

Here is a reminder of the tax brackets your bonus could be taxed at:

• Basic Rate (20%): for income up to £50,270.
• Higher Rate (40%): for income between £50,271 and £125,140.
• Additional Rate (45%): for income over £125,140

The personal allowance (£12,570 for 2025/26) is reduced by £1 for every £2 of adjusted net income over £100,000, disappearing entirely at £125,140. This creates a 60% marginal tax rate on income between £100,000 and £125,140 due to simultaneous 40% tax and loss of personal allowance.

Income tax applies whether it is a sign-on, discretionary, or contractual bonus, and it is also how commission is taxed. At the end of this article, we have an example of how tax for a higher earner’s bonus works in practice.

It is possible to completely avoid tax on a bonus by using pension tax relief, which we will look at below.

Investing a bonus presents some of the most effective ways to reduce your tax burden:

• Maximise pension contributions: If you pay your bonus into a pension, you should receive income tax relief. If you can do so via salary sacrifice, you could save National Insurance on it too. Check with your employer to see if they offer a bonus sacrifice scheme. Along with saving tax on the bonus, putting it into a pension may lower your total salary, which could keep you under certain tax thresholds and allow you to retain child benefit tax relief (if this is relevant to you). Although be aware that salary sacrifice reduces your gross income, which can impact other areas of your finances. You will not be able to access your pension until you are 55 (rising to 57 from 2028), but your money should grow while it is locked away. You do need to be aware of exceeding the limit on your pension allowance, although you may be able to carry forward unused allowances from previous years.
• If your bonus risks exceeding your pension contributions limit, there are other tax-efficient options such as:
  • Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS): VCTs and EIS were launched to encourage investment in small, innovative companies. They do this by providing several tax incentives. For example, EIS offers 30% income tax relief, gains on investments are capital gains free, and loss relief. However, these investments can be risky and are not right for everyone. If you are thinking of allocating your bonus to one, it is worth getting expert advice. This is something we can help with at Arbuthnot Latham.
  • ISAs: Individual Savings Accounts (ISAs) offer tax-free growth on investments. The annual ISA allowance is £20,000, although if you do put some or all of your bonus in an ISA, it would be going in after you have already paid income tax and National Insurance.
  • GIA: If you have already utilised your ISA allowance, you can invest in companies and funds with a General Investment Account (GIA). If you do make withdrawals, you may have to pay capital gains tax.

Using your bonus to pay down high-interest debt can be a smart move. Reducing or eliminating debt not only improves your financial health, but also frees up cash flow for other investments and expenses. You may want to considering paying off credit cards or loans, but it is worth getting advice if you are considering other types debt, such as a mortgage.

An emergency fund is an important part of financial planning. Aim to have at least three to six months' worth of living expenses saved in an easily accessible account. This fund can provide a safety net in case of unexpected expenses or financial setbacks.

While it is important to be prudent with your bonus, you should not be afraid to enjoy your bonus. Consider spending it on:

• Family holidays: Take your family on a memorable trip to create lasting memories and give yourself a well-deserved break.
• Personal indulgences: Whether it is art, a luxury item, a course to learn new skills, or a home renovation, treating yourself can be a rewarding way to use your bonus.

Finally, consider how your bonus can be used to benefit others and plan for the future.

Some of the options may also help reduce inheritance tax, which you may be starting to think about if you are nearing the end of your career. Options to consider:

• Gifting to family: You can gift money to family members, which can be particularly useful for helping children or grandchildren with education or housing costs. Gifts that fall within your annual exemptions, or those made at least seven years before you die, are usually not subject to inheritance tax.
• Estate planning: Use your bonus to fund trusts or other estate planning tools that can help ensure your wealth is passed on according to your wishes.
• Charitable donations: Donating to charity can provide tax benefits and support causes you care about.

Find out more about our wealth management and investment management services.