HM Revenue & Customs (HMRC) has issued a stark seasonal alert to employees across the UK who are expecting a Christmas bonus from their employer. The tax authority warns that the festive pay boost could have an unwelcome side effect: pushing recipients into a higher income tax bracket, meaning a significant chunk of their reward is lost to the Treasury.
The Tax Trap in Your Festive Pay Packet
Financial experts have highlighted the specific risks for different earners. A bonus of just £10,000 could be enough to instantly move a basic rate taxpayer into the 40% higher rate band. This occurs because HMRC typically views such a substantial bonus as a permanent increase in earnings, rather than a one-off gift, when calculating tax due through the Pay As You Earn (PAYE) system.
The situation is even more severe for higher earners. Those with an annual income already above £100,000 face the notorious 60% effective tax rate. This steep rate applies because for every £2 earned over £100,000, the individual loses £1 of their Personal Allowance. The result is that a large portion of any additional bonus is taxed at 40% income tax, plus an effective 20% from the erosion of the tax-free allowance.
Why December Bonuses Are Particularly Problematic
The timing of Christmas payments exacerbates the issue. December often sees a confluence of year-end financial events, including annual bonuses, accrued overtime, or other one-off payments. This cluster of income can create what experts describe as an "artificial income spike" within a single pay period.
HMRC's real-time systems may interpret this spike as a sign of a permanent salary increase for the new tax year. Consequently, a disproportionately large amount of an employee's total annual income becomes subject to taxation at the higher rates, even if their regular monthly salary remains unchanged.
The Smart Solution: Bonus Sacrifice
To protect the full value of a Christmas reward, financial advisers are strongly urging workers to consider a strategy known as "bonus sacrifice." This involves formally agreeing with your employer to redirect all or part of your bonus directly into your workplace pension scheme before it is paid as cash.
The primary benefit is immediate and substantial: the entire bonus amount enters your pension pot free of income tax. For a higher-rate taxpayer sacrificing a £10,000 bonus, this could mean avoiding a £4,000 tax charge instantly.
There is a further financial advantage. Because the bonus is never processed as salary, the employer also saves the 13.8% employer National Insurance contribution on that amount. Many companies are willing to share this saving by adding it to the employee's pension contribution, allowing the festive reward to work even harder for their future.
While the warning, reported on 16 December 2025, casts a shadow over seasonal generosity, it provides a crucial opportunity for employees to engage with their payroll or HR department and make an informed, tax-efficient decision about their Christmas bonus.
