Tax implications of annual bonus vs. salary increase

money_saving_matt

Hi all,

I have recently negotiated a salary increase from 80k to 100k in my job in the private sector. I’m a regular PAYE employee, no other income from other jobs etc.

The MD has indicated that there may be tax implications of taking the 20k increase as salary or as an annual bonus and has given me the choice as to how I take it.

From looking at gov.uk it seems like there is no difference between the way tax and NI is calculated on an annual bonus vs. regular salaried pay.

I’m a bit confused as to why I’m being given the option as it looks like there is no financial difference between the two options.

I’d appreciate any advice/pointers

Many thanks
Matt

Dazed_and_confused

There is ultimately no tax consequences, £100k taxable pay on your P60 is still £100k irrespective of whether you got it equal instalments across the (tax) year or got smaller monthly pay amounts and a one off £20k bonus.

Only the MD can explain what they are hinting at.

If you go the bonus route and get it early in the tax year, say end of April then it can result in a lot of tax for that month because the PAYE system i.e. the payroll section in your company, will see you as earning an annual rate of £320k (£6667 for one month pay (£80k/year equivalent) plus £20k bonus is £26667 in month 1 of the tax year).

But each month you are back to just getting £6667 your annualised amount will drop so by the end of March (tax month 12) you will be on an annualised amount of £100k, just the same as 12 equal payments of £8,333.

You may find your MD isn't a qualified tax expert

Tom99

[FONT=Verdana, sans-serif]I would think a bonus is less secure than a salary rise.[/FONT]

Dazed_and_confused

You may also accurate additional (company) pension entitlement through increased salary and possibly not with the bonus.

But that's a different issue to the tax element.

glider3560

It would make a difference on Class 1 National Insurance for an employee earning less than £3,750 per month (since there is a lower rate above this threshold). But in you case, you are already above the threshold, so it doesn't matter.

Tiptop79

I would always take as a salary increase rather than bonus. If you ever need to apply for a mortgage, or a new job, your applications/future salary expectations are considered on your basic, not bonus and would become hard to explain to 3rd parties.

SuperHan

Tiptop79 wrote: »

I would always take as a salary increase rather than bonus. If you ever need to apply for a mortgage, or a new job, your applications/future salary expectations are considered on your basic, not bonus and would become hard to explain to 3rd parties.

Conversely, I would take as bonus. You could have the bonus in your bank and if something happens and you were to leave/lose your job, you have it banked. You'd miss out on some of a salary increase in those circumstances.

Flip side, if it's an increase year on year, you may be better to take it as you'll definitely get it every year. It depends on your situation I suppose.