In the UK, bonus payments are typically taxed through Pay As You Earn at an individual’s marginal rate. For higher earners, a bonus can push total income into additional or higher rate bands, and may also reduce or eliminate the personal allowance once certain thresholds are exceeded. This means the effective tax rate on part of a bonus can be materially higher than expected.
One of the most direct ways to improve the net outcome is through pension contributions. Redirecting bonus income into a pension attracts tax relief at the individual’s highest marginal rate. Where salary sacrifice is available, there may also be National Insurance savings.
If pension allowances are fully utilised, Individual Savings Accounts provide another structured route. Although contributions are made from post-tax income, growth and withdrawals are free from further UK tax. This creates flexibility alongside longer-term pension provision. Beyond ISA limits, general investment accounts allow continued exposure to markets, though capital gains tax and dividend taxation must be managed.
Arbuthnot Banking Group PLC (LON:ARBB), operating as Arbuthnot Latham, offers private and commercial banking products and services in the United Kingdom. Established in 1833, Arbuthnot Banking is headquartered in London, United Kingdom.
