A bonus is taxed twice over, in two different places. The employee pays income tax and National Insurance on it at their own rates. The company that pays it gets a corporation tax deduction, and how much that deduction is worth depends on where its profits sit: 19p per £1 below £50,000, 26.5p per £1 between £50,000 and £250,000, and 25p per £1 above £250,000.
Figures in this article are for the 2026 to 2027 tax year (financial year 2026, which runs from 1 April 2026 to 31 March 2027). Personal tax figures are for England, Wales and Northern Ireland unless stated. This is general information, not personal tax advice.
How much tax does the company save by paying a bonus?
A bonus is a staff cost, so it reduces the company's taxable profit. The employer National Insurance on it is deductible as well. The saving is the bonus (plus that NI) multiplied by the corporation tax rate that applies to the last pounds of profit.
That rate is not always the headline one. GOV.UK sets out a small profits rate of 19% for profits up to £50,000 and a main rate of 25% for profits above £250,000. Between the two, marginal relief applies. The maths in section 18B of the Corporation Tax Act 2010 works out as an effective rate of 26.5% on each extra pound of profit in the band, which is also what each pound of deduction saves.
| Company profit before the bonus | Corporation tax saved on a £5,000 deduction |
|---|---|
| £30,000 | £950 (19%) |
| £60,000 to £240,000 | £1,325 (26.5%) |
| £300,000 | £1,250 (25%) |
How does marginal relief work?
Marginal relief reduces the tax bill of a company whose profits fall between the lower limit of £50,000 and the upper limit of £250,000. The company first calculates tax at 25% on all its profit, then subtracts the relief.
The formula is: marginal relief = standard fraction × (upper limit minus profits) × (profits ÷ augmented profits). Augmented profits are profits plus most dividends received from non-group companies. For a company with no such dividends, the last term is 1, so the relief is simply 3/200 × (£250,000 minus profits). The standard fraction is 3/200 for this financial year.
For example, imagine a company with £120,000 of profits and no associated companies:
- Tax at 25%: £30,000
- Marginal relief: 3/200 × (£250,000 minus £120,000) = £1,950
- Corporation tax due: £28,050, an average rate of about 23.4%
The limits are not fixed for every company. They are divided by one plus the number of associated companies, and they are reduced pro rata for an accounting period shorter than 12 months. With one associated company, the limits become £25,000 and £125,000. With a six-month accounting period, they also become £25,000 and £125,000. Non-UK-resident companies and close investment-holding companies do not get marginal relief.
The HMRC marginal relief calculator will work out the exact figure for a real company.
What does a £20,000 bonus cost a company?
Take a hypothetical company with £150,000 of profit before the bonus, no associated companies, and an employee already earning £12,570 a year. The company pays a £20,000 bonus.
Employer National Insurance is 15% on pay above the £5,000 secondary threshold. Because the salary is already above that threshold, the full bonus attracts it: £3,000. The total cost is £23,000.
| Measure | Before bonus | After bonus |
|---|---|---|
| Taxable profit | £150,000 | £127,000 |
| Tax at 25% | £37,500 | £31,750 |
| Marginal relief | £1,500 | £1,845 |
| Corporation tax | £36,000 | £29,905 |
Corporation tax falls by £6,095, which is 26.5% of the £23,000 cost. The bonus costs the company £16,905 after tax relief. Notice that marginal relief itself rises, because lower profit sits further below the £250,000 limit. That is why the saving is 26.5% rather than 25%.
How much tax does the employee pay on the bonus?
A bonus is treated as ordinary pay for the tax year in which it is paid. There is no special bonus rate, and there is no separate "bonus tax". It is added to the employee's other earnings, and income tax is charged at 20% on income above the personal allowance (£12,570) up to £50,270, 40% up to £125,140 and 45% above that. Employee National Insurance is 8% between £12,570 and £50,270, and 2% above.
Continuing the example, here is what a £20,000 bonus does to three hypothetical employees:
| Existing salary | Income tax on bonus | Employee NI on bonus | Bonus kept |
|---|---|---|---|
| £12,570 | £4,000 | £1,600 | £14,400 |
| £50,270 | £8,000 | £400 | £11,600 |
| £100,000 | £12,000 | £400 | £7,600 |
The last row is the personal allowance taper. The allowance is withdrawn at £1 for every £2 of income above £100,000, so the tax on the bonus works out at an effective 60%. Student loan repayments of 9% (on income above the plan threshold) would come off these figures too, and Scottish taxpayers pay income tax at Scotland's own six rates.
Company directors calculate National Insurance differently. Directors have an annual earnings period, so NI is worked out on total pay for the year rather than month by month, which means a bonus paid to a director can trigger NI even if their monthly salary is low.
When must the bonus be paid to get the deduction?
If the company accrues a bonus in its accounts, it normally gets the corporation tax deduction for that accounting period. The catch is timing: under section 1288 of the Corporation Tax Act 2009, the bonus must be paid within nine months of the period end. If it is paid later, the deduction moves to the period in which it is paid.
Bonus, dividend or something else?
Dividends are paid out of profits that have already borne corporation tax, and they are not a deductible expense. A bonus is deductible, but it brings income tax and NI for the recipient and employer NI for the company. That is the trade-off, and the answer depends on the recipient's other income and the company's profit level, so run the numbers for both routes.
Employer pension contributions are usually deductible too, within annual allowance limits, and are worth comparing.
Two points catch out small companies. First, the £10,500 Employment Allowance is not available to a company whose only employee paid above the secondary threshold is a director, so the allowance will not offset the employer NI on a director's bonus. Second, a bonus that brings profits down from above £250,000 into the marginal relief band changes the rate at which the last pounds are relieved, so the size and timing of the bonus matter.
What should you do next?
Before paying a bonus, check three numbers: the company's expected profit for the period, whether it has associated companies, and the recipient's total income for the tax year. Put them into the HMRC calculator and a payroll calculator, then ask an accountant to confirm the plan, especially near the £100,000 taper or the £250,000 limit.
Tax rules and thresholds can change, and the Autumn Budget is scheduled for 28 October 2026, so check the current GOV.UK figures before you pay anything.