Many workers will be anticipating a boost in their payslip in the coming weeks when Christmas bonuses arrive – but there may also be an impact on your tax bill.
Staff from industries such as financial services, property and consultancy may be looking forward to Christmas bonus season.
Some commentators attribute Christmas bonuses to the Santa rally in investment markets as bankers may invest their rewards.
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But there are warnings that much of the income could be swallowed up by tax, especially for higher earners.
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Kundan Bhaduri, executive director at asset manager The Kushman Group, said: “A £10,000 bonus pushes many earners from the 20% basic rate into 40% higher rate territory, while those already earning £100,000 face the notorious 60% effective rate as personal allowances disappear.
“The timing makes it worse. December bonuses often coincide with other year end payments, creating artificial income spikes that HMRC treats as permanent earnings progression rather than one off windfalls.”
There are ways to ensure you can keep more of your bonus this year though.
Boost your workplace pension contributions
The most popular way to keep your tax bill down from a regular salary is through pension contributions by using salary sacrifice.
One option for those receiving a bonus is to defer some or all of it into their pension.
Chris Eastwood, chief executive of pensions platform Penfold, said this will cut any income tax and national insurance deductions and boost retirement savings and employer contributions.
He said: “A Christmas bonus can be a welcome boost, but also often easy to lose to tax and short-term spending. However, in redirecting a bonus into your pension, you can make the reward go much further.”
Eastwood explains that choosing to forgo a cash bonus has future benefits if employees choose to pay it directly into their pension, adding: “It is more important than ever for workers to understand how to protect the value of year-end rewards. As bonuses are taxed as regular income, many employees end up disappointed by what actually lands in their accounts after deductions.
"Bonus sacrifice ensures the full value goes through to your pension instead, avoiding these deductions entirely and keeping more of the reward working for your future.”
Eastwood said bonus sacrifice is quick and easy to set up and just requires preparation with payroll departments.
The next few years are ideal times to do this, especially as, from April 2029, the amount of salary sacrifice on pension contributions that is exempt from National Insurance contributions will be capped at £2,000.
Check your company benefits
There may be other company benefits you are eligible for through salary sacrifice that your employer may be able to redirect some of your bonus to.
This would help reduce your overall taxable pay.
Samuel Mather-Holgate, managing director of the independent financial advisers Mather and Murray Financial, said: “You could buy a bike, increase your life insurance or look to beat the queue at the GP surgery and get private medical.
“All can be sacrificed so you don’t just get a tax saving but your employer has a significant national insurance saving that they are usually keen to share with you.”
Equity options
Depending on your role and the industry you work in, some technology and financial roles may offer equity instead of cash as a bonus.
Luke James, tax director at Gravitate Accounting, said: “More commonly, this sits alongside bonuses for senior managers or directors as part of a wider remuneration package.
“Free or discounted shares are treated as a benefit‑in‑kind and therefore boost taxable income at the point of award, but the valuation is often heavily discounted compared to their potential long‑term worth.”
James suggested the upfront tax charge may be outweighed by future capital growth, adding: “Beyond the initial award, dividend income from those shares will add to taxable income, but this is typically taxed at dividend rates alongside the dividend allowance.”
