Bonuses and Overtime: Why Your Payslip Looks Wrong and What You Actually Keep

Published 14 July 2026

Almost everyone who has ever received a bonus has had the same reaction to the payslip. The gross figure is what was promised, the net figure is nothing like what was expected, and somebody in the office says the words "bonuses are taxed at a higher rate". They are not. There is no bonus tax and there is no overtime tax. What actually happens is more interesting, and knowing the mechanics tells you when to worry, when the money comes back on its own, and when a lump sum is genuinely better for you than the same money spread over the year.

PAYE Is Cumulative, and That Is the Whole Explanation

Every payday, your employer does not simply tax that month's pay. They add up everything you have been paid since 6 April, work out how much tax is due on that running total, subtract what you have already paid, and deduct the difference. The tax-free allowance and the basic rate band are shared out across the year in twelfths, so by month six you have had half of each.

When a bonus lands, your running total jumps. If that total goes past the proportion of the basic rate band you have earned so far, the excess is taxed at 40% in that month. Your annual income might end up comfortably inside the basic rate, but payroll cannot know that yet, so it charges what the year-to-date figures say is due.

A Worked Example

Take someone on £45,000 who receives a £5,000 bonus in month six, so September. Monthly salary is £3,750.

Pay to date including the bonus: £27,500.
Tax-free pay to date: half of £12,570, so £6,285.
Taxable to date: £21,215.
Basic rate band available to date: half of £37,700, so £18,850.
Tax due to date: £18,850 at 20% is £3,770, plus £2,365 at 40% is £946. Total £4,716.
Tax already paid in months one to five: £2,702.50.
Tax deducted in month six: £2,013.50, against a normal month of about £540.

That looks brutal on the payslip. Now follow it forward. In month seven, the cumulative calculation runs again, the year to date has grown by only £3,750 and the available band has grown by another twelfth, so the deduction drops to about £453. It stays below normal for the rest of the year. By month twelve, total pay is £50,000, total tax due is £7,486, and every penny of that temporary 40% has been handed back through the payroll without anyone making a claim. Nobody notices, because the refund arrives as slightly smaller deductions rather than as a payment.

When it does not come back automatically: if you leave the job, if you are on an emergency code, or if the bonus genuinely takes your annual income into the higher rate, then the 40% is correct or the correction has to happen after the year ends through a P800 calculation. Cumulative PAYE only fixes itself if you stay in the same employment for the rest of the year.

National Insurance Works the Opposite Way, and It Is in Your Favour

Here is the part nobody explains. National Insurance is not cumulative for ordinary employees. It is calculated on each pay period in isolation, against monthly thresholds of £1,048 and £4,189. Anything above £4,189 in a single month attracts only 2% instead of 8%.

Run the same example. In month six, gross pay is £8,750.

£1,048 to £4,189 at 8%: £251.28.
£4,189 to £8,750 at 2%: £91.22.
Total NI that month: £342.50, against a normal £216.16.

So the £5,000 bonus cost £126.34 in National Insurance, an effective rate of 2.5%. Had the same £5,000 been paid as £416.67 extra each month, every pound would have sat below the monthly upper earnings limit and been charged at 8%, costing £400. Taking it as a lump sum saved £273.66 in NI.

That is a real and permanent saving, unlike the income tax spike, which is temporary. It is also why the total deductions on a bonus month feel worse than they are: the eye-catching income tax is mostly a loan to HMRC, and the National Insurance is quietly cheaper than usual.

Overtime Is Not Taxed Differently at All

Overtime is just pay. There is no separate rate and no separate treatment. What creates the impression of a penalty is exactly the same cumulative mechanism: a heavy month of overtime can nudge your running total past the pro-rated basic rate band, some of it gets taxed at 40%, and it unwinds over the following months if your income settles back down.

The one situation where overtime genuinely costs more is when it pushes your annual income over a real threshold and keeps it there. Crossing £50,270 moves you into 40% permanently on the excess. Crossing £100,000 starts the personal allowance taper and creates an effective 60% rate. Crossing a student loan threshold starts a 9% deduction. Those are annual effects, not monthly ones.

Student Loan Deductions Do Not Self-Correct

This is the trap worth knowing. Student loan repayments, like National Insurance, are worked out per pay period against a monthly threshold. On Plan 2 that is £2,448 a month for 2026/27. If a bonus takes a single month's pay well above the threshold, 9% of the excess is deducted, and the payroll will never give it back even if your income for the whole year comes to less than the annual threshold.

Somebody working part of the year, or on irregular pay, can end up repaying a loan they were not liable to repay that year. It is recoverable, but you have to ask. Contact the Student Loans Company after the tax year ends, show them your P60, and request a refund of overpaid repayments. They do not do it automatically.

Bonus Sacrifice: The One Lever Worth Pulling

If your employer offers it, you can usually give up some or all of a bonus in exchange for an employer pension contribution before it is ever paid. Because the money never becomes salary, it escapes income tax and National Insurance entirely, and many employers pass on some of their own NI saving as well.

For a basic rate taxpayer, £1,000 of bonus sacrificed into a pension costs £720 of take-home pay. For a higher rate taxpayer it costs £580. For someone whose income sits between £100,000 and £125,140, where the marginal rate is 60% plus 2% NI, £1,000 into the pension costs £380 of take-home. That is the single most efficient thing most employees can do with a bonus, and the decision has to be made before the payment date. Once the bonus has been paid, the opportunity has gone for that year.

Sacrifice reduces your gross pay on paper. That matters for mortgage affordability, life cover based on a multiple of salary, statutory maternity and sick pay, and occasionally for keeping earnings above the level that builds a qualifying year for the state pension. Check those before committing a large share of a bonus.

What to Check on a Bonus Payslip

Three things. Confirm the tax code is the same as last month, because a bonus paid on an emergency code is a different problem entirely and will not correct itself through payroll. Check the year-to-date columns rather than the monthly ones, since those are the figures PAYE is actually working from. And if the deduction still looks unexplainable, compare next month's payslip: a temporary spike shows up as a below-normal deduction the following month, whereas a permanent change does not.

If the year has ended and you think you overpaid, your Personal Tax Account will show whether HMRC agrees. They usually issue a P800 automatically between June and November for the previous tax year, and you can claim the repayment online in a few minutes.