PAYE employees – watch OUT for 60% tax on bonuses

Date posted: 17th Oct 2023

The next few months are an important time of year for tax planning.

For some PAYE employees, they may be entitled to a bonus depending upon company performance. Whilst the employer is required to deduct PAYE tax from such bonuses, the tax that they deduct will depend upon the PAYE code issued by HMRC. If HMRC have not issued the correct PAYE code, the employee could end up with a nasty tax surprise, particularly if the bonus pushes their normal earnings over £100,000…..

This is where the effective tax rate of 60% may come into play.


Bobby started a new job on 1 April 2023 with an annual remuneration package of £100,000.

HMRC issued the PAYE code 1257L as Bobby has no other sources of income so it is HMRC’s belief that Bobby has an entitlement to a full personal allowance of £12,570.

Bobby has had a great 2023 and his manager has proposed a bonus of £25,000 to be paid in March 2024. Bobby appreciates that he will pay 40% tax on the bonus (NIC will be due but ignored for this example) – £10,000 and plans to fully spend the remaining circa £15,000 on house improvements to start in May 2024.

However, whilst tax has been deducted at source based on the 1257L PAYE code, as Bobby’s earnings for the year have gone over £100,000 he is not entitled to a full personal allowance. In fact, he is entitled to almost zero. This means that Bobby has to pay tax on c£12,500 of income that was previously deemed to be tax free via the payroll, due to the operation of the PAYE code 1257L.

Bobby therefore faces a further tax bill of £12,500 x 40% – £5,000. Given that Bobby has spent the monies on home improvements, he will need to find £5,000 from personal funds.

This is where the effective 60% tax rate applies as Bobby has paid tax of £15,000 (£10,000 via the payroll and a further £5,000 due via his tax return) on his £25,000 bonus – so 60%….

If Bobby has the funds available (and sufficient remaining pensions allowance), he could make an additional pension contribution which would help reduce the tax due. However, he needs to have the spare cash to do so.

As ever, we are here to help, so please do give us a call.


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