Annual Bonus Tax 2026: Separate vs Merged, Cliffs, and Best Choice
How should your annual bonus be taxed to keep the most money? This is the question countless employees wrestle with every year-end. For the same bonus, choosing separate taxation versus combining it with comprehensive income can change your take-home amount by thousands or even tens of thousands of yuan. Even trickier is the bonus cliff trap — earning just 1 more yuan can leave you thousands of yuan worse off after tax. This article fully explains the 2026 annual bonus IIT policy, the calculation methods of both approaches, a cliff-avoidance comparison, and a decision workflow for choosing the best option.
1. Bonus IIT Policy in 2026
1.1 Separate taxation extended to Dec 31, 2027
Under the policy issued by the Ministry of Finance and the State Taxation Administration, resident individuals who receive a one-off annual bonus (i.e., the year-end bonus) may choose the separate taxation preferential method, and this policy has been extended to December 31, 2027. In other words, bonuses paid in 2026 can still enjoy the separate-taxation preference; whether it continues in 2028 and beyond awaits further official notice.
Until the end of 2027, taxpayers get one choice per year: tax the bonus separately using the monthly tax rate table, or combine it into that year's comprehensive income. This is a one-time choice — once the filing method is set, it cannot be changed within the tax year.
1.2 Two methods compared
✅ Separate tax
- Bonus is taxed independently, apart from salary
- Uses the monthly tax rate table (bonus ÷ 12 to determine the rate)
- Best for high-bonus, high-salary earners
⚠️ Merged into consolidated
- Bonus is combined into annual comprehensive income and taxed as a whole
- Uses the annual 7-level tax rate table
- Best for low-income or low-bonus earners
2. How Separate-Taxation Works
2.1 Calculation steps
The core idea of separate taxation is to "spread the bonus over 12 months" to find the applicable rate, but this is only for finding the rate — the actual tax base is still the full bonus:
- Divide the total annual bonus by 12 to get the "monthly average amount"
- Look up the monthly average in the "monthly-converted comprehensive income tax rate table" to determine the applicable rate and quick deduction
- Tax payable = annual bonus × applicable rate - quick deduction
2.2 7-Level monthly rates
| Level | Avg. monthly bonus (÷12) | Rate | Quick deduction |
|---|---|---|---|
| 1 | Not exceeding ¥3,000 | 3% | 0 |
| 2 | ¥3,000 - ¥12,000 | 10% | 210 |
| 3 | ¥12,000 - ¥25,000 | 20% | 1,410 |
| 4 | ¥25,000 - ¥35,000 | 25% | 2,660 |
| 5 | ¥35,000 - ¥55,000 | 30% | 4,410 |
| 6 | ¥55,000 - ¥80,000 | 35% | 7,160 |
| 7 | Over ¥80,000 | 45% | 15,160 |
2.3 Worked example
Suppose the annual bonus is ¥100,000:
- Monthly average = 100,000 ÷ 12 = ¥8,333.33
- Lookup: 8,333.33 falls in level 2 (3,000-12,000), rate 10%, quick deduction 210
- Tax payable = 100,000 × 10% - 210 = ¥9,790
- After-tax take-home = 100,000 - 9,790 = ¥90,210
👉 Use the free Bonus Tax Calculator
3. Merged into Consolidated Income
2.1 Calculation steps
Combining with comprehensive income means folding the annual bonus directly into the full-year salary and wages and settling at year-end with the annual 7-level tax rate table:
- Annual comprehensive income = salary and wages + annual bonus + other comprehensive income such as labor remuneration
- Taxable income = annual comprehensive income - ¥60,000 basic deduction - employee portion of social insurance and housing fund - special additional deductions - other deductions
- Look up the rate in the annual tax rate table; tax payable = taxable income × rate - quick deduction
- Prepaid tax is reconciled — excess is refunded, shortfalls become tax due
2. Annual 7-level tax rate table
| Level | Annual taxable income | Rate | Quick deduction |
|---|---|---|---|
| 1 | Not exceeding ¥36,000 | 3% | 0 |
| 2 | ¥36,000 - ¥144,000 | 10% | 2,520 |
| 3 | ¥144,000 - ¥300,000 | 20% | 16,920 |
| 4 | ¥300,000 - ¥420,000 | 25% | 31,920 |
| 5 | ¥420,000 - ¥660,000 | 30% | 52,920 |
| 6 | ¥660,000 - ¥960,000 | 35% | 85,920 |
| 7 | Over ¥960,000 | 45% | 181,920 |
3. When this method suits you
- Salary and bonus are both low, so the combined tax rate stays in a lower bracket
- Large special additional deductions (mortgage interest, children's education, elderly care, etc.) that effectively lower taxable income
- The bonus happens to straddle a cliff, so separate taxation would "jump a bracket" and sharply raise the tax burden
4. Side-by-side comparison (worked example)
Using a monthly salary of ¥15,000 (¥180,000 per year) and an annual bonus of ¥100,000, assume the employee's share of social insurance and housing fund is ¥3,000 per month (¥36,000 per year) and there are no special additional deductions:
| Item | Separate taxation | Combined with comprehensive income |
|---|---|---|
| Taxable income on salary | 180,000 - 36,000 - 60,000 = 84,000 | 180,000 + 100,000 - 36,000 - 60,000 = 184,000 |
| Tax rate on salary | 10% (level 2) | 20% (level 3) |
| Tax on salary | 84,000 × 10% - 2,520 = ¥5,880 | — |
| Tax rate on bonus | 10% (monthly avg. 8,333) | Merged; no separate rate |
| Tax on bonus | 100,000 × 10% - 210 = ¥9,790 | — |
| Total tax payable | ¥15,670 | ¥19,880 |
| Total take-home | ¥228,330 | ¥224,120 |
| Difference | Separate taxation yields ¥4,210 more | |
5. Avoiding the annual bonus cliffs (key section!)
1. What is a cliff?
Because the bonus ÷ 12 rate lookup applies at the level of the whole amount, once the bonus crosses a bracket boundary the entire bonus jumps to a higher rate band, abruptly inflating the tax. This is the infamous "¥1 more, thousands less" phenomenon.
2. The six cliffs in detail
| Cliff (¥) | Rate jump | Tax after adding ¥1 | Take-home change |
|---|---|---|---|
| 36,000 | 3% → 10% | 1,080 → 3,390 | ¥2,309 less |
| 144,000 | 10% → 20% | 14,190 → 27,390 | ¥13,199 less |
| 300,000 | 20% → 25% | 58,590 → 72,340 | ¥13,749 less |
| 420,000 | 25% → 30% | 102,340 → 121,590 | ¥19,249 less |
| 660,000 | 30% → 35% | 193,590 → 223,840 | ¥30,249 less |
| 960,000 | 35% → 45% | 328,840 → 416,840 | ¥87,999 less |
3. How "¥1 more, thousands less" works
Using the ¥36,000 cliff as an example:
- Bonus of ¥36,000: monthly avg. ¥3,000, rate 3%, tax = 36,000×3% - 0 = ¥1,080, after-tax ¥34,920
- Bonus of ¥36,001: monthly avg. ¥3,000.08, jumps to 10%, tax = 36,001×10% - 210 = ¥3,390.1, after-tax ¥32,610.9
- Result: with ¥1 more bonus, you end up ¥2,309 worse off after tax
4. Safe-zone table for avoiding cliffs
Behind every cliff lies a "danger zone" — a bonus landing inside the zone leaves you with less than at the cliff itself, and you only "break even" once the amount exceeds the upper bound:
| Cliff | Danger zone | Safe amount |
|---|---|---|
| 36,000 | 36,001 - 38,566 | ≤ 36,000 or > 38,566 |
| 144,000 | 144,001 - 160,500 | ≤ 144,000 or > 160,500 |
| 300,000 | 300,001 - 318,333 | ≤ 300,000 or > 318,333 |
| 420,000 | 420,001 - 447,500 | ≤ 420,000 or > 447,500 |
| 660,000 | 660,001 - 706,538 | ≤ 660,000 or > 706,538 |
| 960,000 | 960,001 - 1,120,000 | ≤ 960,000 or > 1,120,000 |
6. How to choose the best method
Decision checklist
- Calculate both methods: use this site's bonus calculator to estimate the tax under separate taxation and under combining with comprehensive income
- Compare after-tax amounts: choose the method that gives the higher take-home
- Check for cliffs: if separate taxation lands right at a cliff, seriously evaluate whether combining is better
- Factor in other deductions: with more special additional deductions, combining is more favorable
- Only one choice per year: once the filing method is set, it cannot be changed within the tax year
Quick reference: which to choose
✅ Choose separate taxation
- Salary already pushes taxable income into a higher bracket
- Bonus is large, and separate taxation can "split" it into a lower band
- Few special additional deductions
⚠️ Choose combining into comprehensive income
- Both salary and bonus are low, so the combined amount stays in a lower band
- Large special additional deductions that lower taxable income
- Separate taxation would hit a cliff
7. Frequently asked questions (FAQ)
Q1: Will the separate-taxation policy for annual bonuses continue?
A: The policy currently runs through December 31, 2027. Bonuses paid in 2026 still qualify. The policy for 2028 and beyond awaits official notice — keep an eye on the latest announcements from the Ministry of Finance and the State Taxation Administration.
Q2: Can multiple bonuses paid within a year all use the annual bonus policy?
A: No. The one-off annual bonus preference can be used only once per year. If several bonuses are paid within a year, only one can use separate taxation; the rest must be combined into comprehensive income.
Q3: Can a bonus be split — half taxed separately and half combined?
A: No. A single bonus must be treated as a whole — either all under separate taxation or all combined into comprehensive income; it cannot be split.
Q4: Can the bonus cliff trap be avoided?
A: Yes. The simplest fix is to adjust the bonus amount so it sits exactly at or just below a cliff (e.g., ¥36,000 instead of ¥36,001), or defer the excess to the following year. Switching to combining with comprehensive income also works.
Q5: After choosing to combine, can I switch back to separate taxation?
A: Not within the same tax year. Once a method is chosen, it cannot be changed for that year. Use the calculator to compare thoroughly before the annual settlement, then decide.
Q6: After the bonus is combined, does it affect next year's tax bracket?
A: The bonus is combined into that year's comprehensive income and does not affect the next year. However, if combining pushes your taxable income into a higher bracket for that year, it raises that year's tax burden — weigh this carefully.
Q7: Can I still use separate taxation if I left my job during the year?
A: Yes. As long as it meets the definition of a one-off annual bonus and the preference has not been used that year, a bonus received after leaving a job can also use separate taxation.
Q8: Can foreign individuals use separate taxation for their bonuses?
A: Starting January 1, 2022, foreign individuals no longer qualify for the separate-taxation preference and must combine their bonuses into comprehensive income. However, resident individuals (including residents of Hong Kong, Macao and Taiwan) still qualify, with the policy extended to the end of 2027.
Use the annual bonus tax calculator