Timing a Bonus Across a 5 April UK Year End and a 31 December US One

A bonus paid in Britain to someone who also files in America raises three separate "which year" questions, and they routinely give three different answers. US law asks which country's workdays earned the bonus, then asks which US calendar year you received it. UK law asks only when it was actually paid to you. Get those three answers written down before anything else, because every foreign tax credit problem that follows is a consequence of them not lining up.

Three questions that sound like one

The reason this subject is so badly served is that almost everything written about it collapses three questions into one. They are:

1. Sourcing. Is the bonus US-source or foreign-source income? This is answered by reference to where the work was performed during the period the bonus rewarded — not by where it was paid from, and not by where you lived when it arrived.

2. US timing. Which US calendar year does it fall into? For an individual on the cash basis, that is the year of receipt.

3. UK timing. Which UK tax year does it fall into? Employment income is taxed on the receipts basis, so again the year of payment — but measured against a year ending 5 April rather than 31 December.

A February bonus rewarding the previous calendar year's performance, paid to someone who moved mid-period, can be partly foreign-source, taxed in full in one US year, and taxed in a UK year that does not close until the following 5 April. All three answers are right. None of them agree.

Sourcing: workdays in the period the bonus rewarded

Compensation is sourced to where the services were performed. For a bonus, the services in question are the ones performed during the period the bonus was earned, which is why the apportionment is normally done on a workday ratio: workdays in the relevant country over total workdays in the earning period.

That has consequences people find counter-intuitive:

A bonus paid after you arrive in the UK can still be partly US-source, if part of the performance period was worked in America.
A bonus paid by a US employer into a US account to someone working in London is foreign-source to the extent of the London workdays. The paying entity does not decide it.
A long-vesting or deferred award rewards a long period, so its apportionment can straddle a relocation and has to be computed, not assumed.

Keep a workday diary from the start of any period that might be rewarded later. Reconstructing one long afterwards from calendar entries and boarding passes is possible but expensive, and it is the single most common missing document in this type of engagement. The IRS sets out the sourcing and apportionment framework in Publication 514.

UK timing: paid is paid, including after you leave

On the UK side the rule is simpler and more unforgiving. Employment income is taxed when it is received, and PAYE is operated on payment. HMRC's manual is explicit that where a payment is made after an employment has ended, PAYE must still be applied on payment (HMRC Employment Income Manual EIM42222).

So a bonus paid in the June after you have left Britain is still a UK payment event, and your former employer will deduct from it. Whether the UK ultimately has the right to tax all of it is a separate question — it depends on where the work was done, on your residence position for the year, and if you had a split year, on which part of it the payment falls into. The withholding happens first and the correction comes later, through the return rather than through payroll. If your departure or arrival straddles a year, read how split-year treatment works when you move between the US and UK alongside this.

Two UK features make a bonus worse than ordinary salary:

The personal allowance taper. The allowance is £12,570 and it is withdrawn by £1 for every £2 of income above £100,000 (gov.uk, Income Tax rates and allowances). A bonus that carries income through that band is taxed at an effective marginal rate well above the headline higher rate, because the bonus also destroys allowance as it goes.
National Insurance is not a creditable tax. Employee NIC comes out of the bonus and cannot be claimed as a foreign tax credit on the US return. It is a real cost of the payment with no American offset.

Why the year mismatch costs money, not just patience

If the two systems simply taxed the same money in differently labelled years, the credit mechanism would smooth it out. It often does not, and here is why.

A US foreign tax credit is claimed on Form 1116 and is limited: the credit for a category of income cannot exceed the US tax on that category of foreign income for the year. Put UK tax into a US year that does not hold the matching foreign income, and the limitation bites — you have credit you cannot use, while a different year has US tax you cannot cover.

That is exactly what a bonus does. The UK tax on a bonus paid in February is suffered in a UK year running to the following 5 April, and the balancing UK liability may not even be settled until the January after that. The US year that taxed the bonus has long since closed.

The lever the US system gives you is the paid or accrued election. A cash-basis taxpayer claims credit for foreign taxes in the year they are paid, or may elect instead to claim them in the year they accrue. That election changes which US year a UK tax lands in, and it is not a decision to take lightly: once made, it governs the current year and later years, and reversing it is not a simple matter of changing your mind on next year's return. The authority is the instructions to Form 1116, and the choice should be made with the whole multi-year picture in front of you rather than to fix one bonus.

Where credit still cannot be used in the year it arises, it does not simply vanish — unused foreign tax credit in a category carries back a limited period and forward for considerably longer. Confirm the current carryback and carryforward periods for your year before you rely on them, and read how foreign tax credit carryovers actually work if you are already carrying a balance.

The sequencing problem nobody states

Here is the question that sends people to forums, and that most guidance answers only in general terms: my bonus was paid in February, my US return is due before the UK tax year containing it has even closed, so what do I actually file?

Four practical points.

File the UK position first where the calendar allows it. The size of the UK tax on the bonus is an input to the US credit computation, not the other way round. Where it does not allow it, use a US extension deliberately rather than filing a US return on a UK figure you have estimated and will have to revisit.

Know which US deadline you are working to. A US citizen abroad gets an automatic extension to 15 June, and a further extension to 15 October on request. That is often enough to see a UK liability settled, and it is the cheapest tool in this whole exercise.

Expect to revisit the credit. If the UK liability on the bonus is later determined to be higher or lower than the figure you claimed credit for, that is a change in the foreign taxes paid or accrued and the affected US year has to be corrected. Budget for that as normal practice rather than as a mistake.

Translate once and record the rate. The UK figures are in sterling and the US computation is in dollars. Pick a defensible convention for the relevant date, apply it consistently across both filings, and keep a note of what you used. Consistency matters more than precision here, and an undocumented rate is the thing that unravels an otherwise clean position.

What you can actually control

Rather less than the internet suggests, but not nothing.

The payment date, occasionally. Where an employer genuinely has discretion over when a bonus is paid, moving it across either year end changes which years the income and the credit fall into. Ask early; by the time a bonus is announced the date is usually fixed, and a payment you can call for at will may be treated as received anyway.
Pension contribution instead of cash, which is a well-trodden UK route but needs the US treatment of a UK workplace pension or SIPP considered at the same time. Do not assume the two sides agree.
The paid-or-accrued election, once, with the multi-year picture in view.
The evidence. Payslips rather than the P60, because a P60 reports a UK year and a US return needs calendar-year figures; the bonus award letter showing the performance period; the workday record for that period; proof of the UK tax actually paid and when.

A P60 is the wrong shape for a US return and no amount of arithmetic on it will make it the right shape. Keep the payslips.

If the bonus is later repaid

A clawed-back bonus is a different problem with different authority — relief in the year of repayment on both sides, under negative earnings in the UK and the claim-of-right rule in the US. We cover that separately in a UK bonus clawback and the US return. The year-end mismatch described here still applies to the repayment, which is why the sequencing question appears in both.

Where we fit

We build the bonus picture as one schedule rather than two returns: the performance period and its workday split, the sourcing answer that follows, the UK year and the US year the payment lands in, the UK tax actually suffered and when it was paid, and the credit position across the affected years including anything carried. Then we decide the filing order and which extension to use.

Every return we prepare is reviewed and signed by a licensed professional — an IRS Enrolled Agent who is also ACCA-qualified — so one person owns both sides of the reconciliation. More on how we handle dual-filing employment income is on our US-UK tax specialists page; you can also see what this work costs or book a consultation and bring the bonus letter with you.

Rates, thresholds and the credit carry periods change. Confirm the figures for your own years before acting on them.

Frequently asked questions

Does my UK bonus get taxed in the US or UK?+

Usually both, with a credit mechanism meant to stop you paying twice. The UK taxes it as employment income received, with PAYE operated on payment. The US taxes it because you are a US person filing worldwide, and then gives you a foreign tax credit for the UK tax. Whether it is US-source or foreign-source income is a separate question from who taxes it: sourcing follows where the work was performed during the period the bonus rewarded, normally apportioned on a workday ratio, and the paying entity and the account it lands in do not decide it.

How do you handle the different UK and US tax years?+

You do not convert one year into the other; you build calendar-year figures from source documents. Work from payslips rather than the P60, because a P60 reports a UK year ending 5 April and a US return needs the calendar year to 31 December. Then record, for each payment, the UK tax year it falls in, the US calendar year it falls in, and when the UK tax on it was actually paid, because the credit computation turns on that last date. A single schedule spanning every affected year is the only reliable way to do it.

Is bonus taxed differently in the UK?+

Not by a special rate, but in practice yes. A bonus is taxed as employment income at your marginal rate, and because it arrives as a lump it often pushes income through bands and through the personal allowance taper: the allowance is £12,570 and it is withdrawn by £1 for every £2 of income above £100,000, so income passing through that range is taxed at an effective marginal rate well above the headline higher rate. Employee National Insurance also comes out of it, and NIC is not a creditable tax on a US return.

Do I pay UK tax on US earnings?+

If you are UK resident, your worldwide employment income is in principle within UK tax, so a bonus paid by a US employer can be taxed in Britain. If you were not UK resident for part of the earning period, or you had a split year, only part of it may be within UK charge, and the apportionment depends on where the work was performed. The withholding that happens first is not the final answer; the return is. Where both countries tax the same bonus, relief comes through the credit mechanism rather than through either payroll.

Can you ask for the bonus in a different year?+

Sometimes, and it is worth asking early. Where an employer genuinely has discretion over the payment date, moving a bonus across either year end changes which UK year and which US year hold the income, and therefore which years hold the credit. Two cautions: by the time a bonus is announced the date is usually fixed, and a payment you could call for at will may be treated as received anyway, so an informal deferral you control is not reliably a deferral for tax. Get it agreed in writing before the award is made, not after.