Bonuses and commission

A bonus is not a windfall the tax system ignores. It is ordinary earnings that happen to arrive in one lump.

Why bonuses feel so heavily taxed

Two things happen at once. First, the whole bonus sits on top of your normal pay, so most of it is taxed at your marginal rate - the highest rate you reach. Second, some payroll systems briefly treat the bonus month as if it were your normal monthly income, temporarily over-deducting. In cumulative tax systems the excess washes out over later months or at year end.

A useful rule of thumb: assume you will keep somewhere between half and two thirds of a bonus, and be pleasantly surprised rather than disappointed.

Commission and targets

Commission is taxed the same way but arrives less predictably. If a large share of your income is commission:

• Budget on your basic pay only and treat commission as extra.
• Watch the payment timing - commission often lands one or two months after the sale.
• Check the scheme rules for clawback if a customer cancels or refunds.

Before you spend it: three better uses

1. Bonus sacrifice into a pension. In many systems you can divert a bonus into your pension before tax and contributions apply, which is the largest single boost available to most employees. 2. Clear expensive debt. Paying off a 25% card is a guaranteed 25% return. 3. Top up your emergency fund, then spend what is left deliberately.

Contract details worth reading once

Is the bonus discretionary or contractual? Must you still be employed, and not under notice, on the payment date? Is there a clawback window? These clauses decide whether a bonus is something you can plan around or simply hope for.