Bonus tax rates are a subject that is often misunderstood. Many people believe that bonuses are treated as income and as such they need to pay Capital Gains Tax on them. This is completely untrue. In fact, bonuses are usually paid in full, which is subject to taxation on dividends and capital gains even when they have not been used.
Bonus Tax Rate
The bonus tax rate that you pay will largely depend on the way that your employer treats your bonus. First, let’s look at how bonuses are usually taxed discount and bonuses. If you receive a bonus based on an annual performance evaluation, and if that performance improves your pay grade, then your bonus may be subject to CVA or the aggregate method. In this method, your bonus is treated as income for the year it is received and prorated according to a percentage of your yearly wages. For example, if you receive a bonus of one thousand pounds in April, your bonus amount is then reduced by 40% (i.e. you would receive half a million pounds).
If however, your bonus is paid in conjunction with the provision of a supplementary wage or regular wages, then your bonus is not subject to CVA and will not be taxed. However, some companies do actually apply this system of withholding bonuses. If you receive bonuses that exceed the statutory withholding limit, your bonus is then taxable as ordinary income. In addition, bonuses paid with pre-tax funds may also be taxed as ordinary income if they exceed the pre-tax withholdings.