Why Is My Bonus Taxed So Much? The Truth About Bonus Tax in Australia
Think you're paying 47% tax on your bonus? You're not. Bonuses aren't taxed at a higher rate — they're withheld at a higher rate. Here's how Schedule 5 works and why you'll get most of it back at tax time.
Bonuses aren't taxed at a higher rate — they're withheld at a higher rate
This is the single most misunderstood concept in Australian payroll. Your bonus is not taxed at a special "bonus tax rate." There is no separate tax bracket for bonuses. Instead, your employer is required to withhold more PAYG tax upfront when processing a lump sum payment like a bonus. This is because the ATO's withholding schedules assume the payment pattern will continue — so a large one-off payment signals to the withholding calculation that you earn a much higher annual salary than you actually do. The result? Your payslip shows a huge tax deduction on your bonus, but you have not actually been taxed more. The extra withholding is essentially an overpayment to the ATO that gets reconciled when you lodge your tax return. If you received a $5,000 bonus and it looks like $2,300 was taken in tax, you will likely get most of that excess withholding refunded at tax time.
How employers calculate withholding on bonuses (Schedule 5 / Method B)
The ATO provides two methods for calculating PAYG withholding on bonuses and other lump sum payments. Method A (Plan B) is simpler: the employer adds the bonus to a normal pay period, calculates total withholding on the combined amount, then subtracts the normal withholding. This often results in very high withholding because it assumes you earn that inflated amount every pay period. Method B (Schedule 5) is more nuanced and usually produces lower withholding. It calculates withholding based on your total estimated annual earnings including the bonus. Most payroll software defaults to Method A because it is easier to implement. If your bonus withholding seems extreme, you can ask your payroll department which method they are using. Employers are not required to use either specific method, but using Method B typically results in withholding closer to your actual tax liability, meaning a smaller refund — and less of your cash tied up with the ATO for months.
Worked example: $5,000 bonus on an $80,000 salary
Let's walk through the numbers for someone earning $80,000 base salary who receives a $5,000 bonus. Under Method A, the payroll adds $5,000 to a fortnightly pay of $3,076.92, creating a combined pay of $8,076.92. The withholding tables for $8,076.92 per fortnight suggest an annual income of roughly $210,000 — placing you in the 45% marginal bracket. Withholding on the bonus portion works out to approximately $2,350 (47% effective rate). But your actual annual taxable income is $85,000. At the standard 2025-26 individual tax rates, the extra tax on that $5,000 is only about $1,625 (32.5% marginal rate plus 2% Medicare levy). That means approximately $725 has been over-withheld. You will receive that $725 back as part of your tax refund when you lodge your return. The bonus itself was always only going to cost you around $1,625 in actual tax — not $2,350.
When you get the excess withholding back
The over-withheld tax on your bonus is returned to you when you lodge your annual tax return. For most Australians, this is between July and October following the end of the financial year. If you received a bonus in September 2025, you would get the excess back when you lodge your 2025-26 return after 1 July 2026. There is no way to get an immediate refund or adjustment during the financial year, unless your total withholding is significantly out of proportion and you apply for a PAYG withholding variation from the ATO. Some employees ask their employer to split the bonus across multiple pay periods to reduce the per-period withholding impact, but this does not change the total tax owed — only the timing of withholding. If you are expecting a large bonus and want to understand the actual tax cost, use our Tax Calculator to estimate your true annual tax liability with the bonus included.
Special cases: salary sacrifice and bonus sacrifice into super
One popular strategy to reduce the effective tax on a bonus is to salary sacrifice it into superannuation before it is paid. If arranged with your employer before the bonus is earned, the amount goes directly into your super fund as a concessional (pre-tax) contribution, taxed at just 15% inside the fund — well below the 32.5% or 37% marginal rate most bonus recipients face. However, there are limits. Total concessional contributions (including your employer's 12% SG) are capped at $30,000 per financial year for 2025-26. Exceeding this cap means the excess is added to your assessable income and taxed at your marginal rate, plus a 15% excess concessional contributions charge. You also need to arrange the sacrifice before the bonus is paid — retrospective salary sacrifice is not permitted. For a $5,000 bonus on an $80,000 salary, sacrificing into super would save approximately $875 in tax compared to taking it as cash, assuming you have cap room available.
How to check your actual tax position
If you have received a bonus and want to confirm how much tax you actually owe, start by logging into your myGov account linked to the ATO. Your income statement (formerly group certificate) shows total gross income and total PAYG tax withheld for the year to date. Compare the withheld amount against the actual tax you would owe on your total annual income using the ATO's standard individual tax rates. For 2025-26, the brackets are: 0% on income up to $18,200, 16% on $18,201-$45,000, 30% on $45,001-$135,000, 37% on $135,001-$190,000, and 45% on income above $190,000 — plus 2% Medicare levy on the entire taxable income. If total withholding exceeds the calculated tax, the difference becomes your refund. Use our Take-Home Pay Calculator to model your full-year position including any bonuses, and see whether you are on track for a refund or a tax bill at year end.
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General information and estimates only — not legal, financial, or tax advice. Always verify with the Fair Work Ombudsman (13 13 94) or a qualified professional.
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