The band where every extra pound costs you sixty pence

Figures relate to tax year 2025-26 (UK) · 2025 (US)

The number lands in March and it looks like a good year. Then the payslip arrives and roughly half of it has gone.

For a British colleague that is simply the price of a high income. For you there is a second layer underneath it.

Bonus payments sit at the worst point of both systems at once. Britain charges its steepest marginal rate while America gives you credit you may never be able to use.

Key takeaways

• Bonus payments are taxable in America when you receive them.
• Britain can charge an effective 60 per cent on part of them.
• That excess British tax often generates unusable credit.
• Sacrificing bonus payments into a pension is treaty protected.
• Deferred awards are taxed on different dates by each country.
• A clawback repaid later needs fixing on both returns.
• The two tax years rarely line up, which complicates relief.

What are bonus payments for tax purposes?

Ordinary employment earnings, taxed through payroll in Britain and reported as wages in America. Nothing about the label changes their character. What makes them awkward is size and timing rather than any special rule applying to them.

So a large lump in one month distorts both calculations, because bonus payments arrive all at once.

That distortion is where the planning opportunities and the traps both live.

What is the 60 per cent band?

The stretch of income where the personal allowance tapers away, creating an effective marginal rate far above the headline figure. For 2025-26 it runs between £100,000 and £125,140. Each extra pound costs 40 pence of tax plus the loss of 50 pence of allowance.

According to GOV.UK guidance on income tax rates, the allowance reduces by £1 for every £2 above £100,000.

A bonus landing across that band is the most expensive money you will ever earn.

A worked example

Take an illustrative example. An American in London earns £95,000 and receives a £35,000 bonus in March 2025.

The first £5,000 falls in the 40 per cent band. The next £25,140 sits in the taper, taxed at an effective 60 per cent.

So her British tax on the bonus payments comes to roughly £19,000. America would have charged far less on the same money.

The difference becomes excess foreign tax credit, parked in a balance she may never spend.

The two systems on one bonus

Why does the credit go to waste?

Because a credit can only offset American tax on foreign income of the same kind, and the American rate on salary is lower than the British one. Paying 60 per cent against a 37 per cent charge leaves a surplus with nowhere to go.

Our guide to foreign tax credit carryovers explains how long that surplus survives.

In our practice most of it expires untouched a decade later.

Should you sacrifice the bonus into a pension?

Very often, because this is the strongest move available on bonus payments. Sacrificing removes the money from the taper entirely, saving tax and national insurance at the same time. Many employers add their own saved contributions on top of it.

Our guide to salary sacrifice for US citizens covers the mechanics.

The American question is whether the sacrifice also works there, which the next section answers.

Does the treaty cover pension sacrifice?

It does, which surprises people who assume America ignores British pensions. The treaty allows contributions to a recognised British scheme to escape American tax within limits mirroring domestic plans. Employer contributions are not treated as your income.

Our guide to employer pension contributions and US tax sets out the limits.

Claiming it requires a disclosure on the return rather than silence.

What about the annual allowance?

A large sacrifice can breach it, particularly where you already contribute monthly. For 2025-26 the standard allowance stands at £60,000, tapering for high earners. Carrying forward unused allowance from earlier years often solves it.

Check three years back before sacrificing a substantial bonus.

A breach produces a charge that undoes much of the saving.

How are deferred bonus payments treated?

Each country picks its own moment for deferred bonus payments, which creates a mismatch across years. Britain generally taxes a deferred award when it vests and becomes unconditional. America taxes cash when it arrives, and shares when the forfeiture risk ends.

Those dates can fall in different calendar years entirely.

Our guide to share incentive plans and US tax covers the equity version.

Does the UK tax year cause problems?

Constantly, because Britain runs to 5 April while America runs to 31 December. A bonus paid in March and another the following April sit in two British years but one American one. The credit then has to be matched carefully.

Our guide to income apportionment between the two covers the day counting side.

Electing the accrual method for credits usually helps here.

What happens if the bonus is clawed back?

Both systems have a route for clawed back bonus payments, and neither is automatic. Britain can treat the repayment as negative earnings in the year of repayment. America offers relief where you repaid money previously taxed under a claim of right.

The American relief can give either a deduction or a credit, whichever helps more.

Keep the clawback clause and the repayment evidence together.

Does national insurance affect the American side?

Not as a credit, because social security contributions are not creditable foreign taxes. Employee contributions for 2025-26 run at 8 per cent up to the upper limit and 2 per cent above it. None of that reduces your American bill.

The totalisation agreement decides which country collects instead.

Our guide to the certificate of coverage covers the choice.

Can you ask for the bonus in a different year?

Sometimes, where the employer is flexible and the scheme rules allow it. Splitting bonus payments is easier in theory than in payroll. Splitting a bonus across two British tax years can keep you below the taper in both. The American position barely changes, since the total is the same.

Ask early, because payroll calendars harden quickly.

Constructive receipt rules limit how far this can be pushed.

What about a signing bonus?

It usually relates to the period it secures, typically the first year of service. Where the payment compensates for something forfeited elsewhere, the analysis can point back instead. The wording of the clause decides it.

Read the contract rather than assuming it belongs to the year of payment.

Repayment conditions attached to these are common and bite hard.

Does charitable giving help?

In Britain yes, because gift aid extends the basic rate band and can pull bonus payments out of the taper. In America a gift to a British charity is generally not deductible. So the relief works on one side only.

Our guide to charitable giving across both systems covers the routes.

Check you pay enough British tax to support the claim.

Does a bonus affect child benefit?

It can, because the high income charge claws the benefit back once income passes the threshold. A single large bonus therefore costs more than the tax alone. Sacrificing into a pension reduces the measure used for that charge as well.

Our guide to the high income child benefit charge covers the thresholds.

So one sacrifice can solve two problems at once.

What if you leave before the bonus is paid?

Most schemes make payment conditional on still being employed, so leaving usually forfeits it. Where a bonus does follow you out, it still relates to the work you did and apportions accordingly.

Check the good leaver wording rather than the headline rule.

Garden leave complicates the day count, because duties technically continue.

Does the employer withhold American tax?

Almost never, because a British payroll has no mechanism for it. Your employer deducts British tax and national insurance, and the American liability lands on you directly. Quarterly payments are often the answer.

Our guide to estimated tax payments from the UK covers the timetable.

A first bonus year catches people without the cash set aside.

Is a cash bonus better than shares?

For simplicity, usually yes, since cash is taxed once on a known date. Shares bring vesting dates, two base costs and currency movement on top. The American timing rules on shares rarely match the British ones.

That said, an employer discount on shares can outweigh the admin.

Compare the net value rather than the headline figure.

Does a bonus change your payments on account?

It can, where you file a British return and the bonus pushes you into self assessment. Payments on account are based on the previous year, so a one off bonus inflates the following January and July demands. A claim to reduce them is available.

Our guide to payments on account covers how to make that claim.

Reduce them only where you are confident the income really has fallen.

What records should you keep?

Keep the bonus letter stating the period it rewards, the payslip showing deductions, any sacrifice election and the clawback clause. Those four documents answer every question either authority can ask about the payment.

Note the exchange rate applied on the date of receipt.

Keep them for six years, longer where a deferral runs on.

How to handle a bonus

1. Work out where the bonus lands against the £100,000 threshold.
2. Model the British tax with and without a pension sacrifice.
3. Check your annual allowance and any carry forward available.
4. Confirm the treaty position before claiming American relief.
5. Record the date of receipt and the rate you converted at.
6. Check whether bonus payments span two British tax years.
7. Keep the clawback clause with your tax papers.
8. Review the credit position before choosing a relief method.

Mistakes and penalties we see with bonus payments

The first is ignoring the taper until the payslip arrives. By then the sacrifice window has shut. So the useful decisions all happen earlier than people think.

The second is sacrificing without checking the annual allowance, which triggers a charge.

The third is claiming treaty relief silently. The position needs disclosing on the return.

The fourth is handling a clawback on one side only, which leaves tax paid on money you gave back.

How US UK Tax Accountants helps

We model the bonus before it is paid, because every useful decision happens before the payroll run. That means the sacrifice amount, the allowance check and the treaty disclosure together.

Where a clawback has happened, we fix both returns rather than one. Our treaty relief service covers the pension positions.

If a bonus is due in the next few months, get in touch while the choices are still open.

Last reviewed 17 October 2026. This article is general information and not personal tax advice. Scheme rules differ, so take advice on your own arrangement.