If your employer offers a bonus scheme, there’s nothing more exciting than imagining what you’re going to do with that extra cash. Clear some debt, go on holiday, treat yourself to that thing you’d had your eye on for ages. But did you know you can use your bonus to make you more money in your future with bonus pension sacrifice?
What is salary sacrifice?
Salary sacrifice itself is the government allowed scheme that helps you and your employer save on tax. You’re giving up part of your salary in exchange for non-cash benefits like childcare vouchers and bicycles through cycle to work schemes, or even salary sacrifice pensions.
What is bonus pension sacrifice?
The headline grabbing benefits such as childcare vouchers and cycle to work are now well established, but bonus pension sacrifice is another really popular salary sacrifice benefit too.
The majority of us if we receive a bonus have it paid into our bank account after UK Income Tax and National Insurance contributions have been deducted. Bonus pension sacrifice is when you ask your employer to pay all or some of your bonus into your pension plan. One of the biggest reasons for paying your bonus into your pension is because you save on tax and increase your pension pot at the same time. But there other things to consider so let’s explore further and you can weigh up whether it's right for you.
Just bear in mind that the value of a pension can fall as well as rise, and you could get back less than has been put in.
Your exact tax benefits will depend on your circumstances and may change in the future.
Should I pay my bonus into my pension?
It’s a great question and there’s some really good reasons why so many people do it and why you could benefit from paying your bonus into your pension too. Firstly, if you salary sacrifice your bonus you’ll receive the full value without losing any of it to tax i.e. UK Income Tax, and you’ll pay less National Insurance too. And secondly, because you receive the full value of your bonus(es) paid into your pension it could really boost the size of your pension pot when you retire.
Let’s say you’re earning £38,000 per year and are about receive a £3,000 bonus. If you want your bonus now and have it paid into your bank account, you’ll pay 20% tax and 8% National Insurance – based on 2024/2025 tax year rates – which looks like this:
£3,000 bonus
-£600 UK Income Tax
-£240 National Insurance
= £2,160 in your pocket.
Whereas if you use pension bonus sacrifice and pay all of it into your pension you’ll get the full £3,000 invested into your pension plan.
Your employer might also be willing to pass on some of the employer National Insurance payments that may have been taken from your bonus, which would mean more than £3,000 being added to your pension. And if you’re a higher rate tax payer, then your tax savings could be even more. Over time with future bonus payments into your pension, it can really add up.
Whether you should pay your bonus into your pension is a really personal decision. If you're looking forward to your bonus and have it earmarked for something special then why not have the bonus paid to you and enjoy the fruits of your hard work?
On the other hand, you may be thinking about the future and wanting to build your pension pot, in which case, bonus pension sacrifice is a great way of increasing your pension contributions in a tax-efficient way.
What are the pros and cons of paying your bonus into your pension?
| Pros | Cons |
|---|---|
- It's tax-efficient because you don’t pay tax on pension contributions since it’s not counted towards your taxable income. - If you pay your bonus into your pension you’ll benefit from the full amount being added to you pension plan. - If your bonus pushes your earnings into the next UK Income Tax band, then bonus pension sacrifice could help you avoid having to pay more tax. - If you’ve already used up your annual allowance for this tax year, you may be able to ‘carry forward’ any unused annual allowance from the previous three tax years to pay more into your pension through your bonus. | - If you pay your bonus into your pension it’s not normally counted as income and lenders – for mortgages and loans - might not include it in your earnings and therefore offer to lend you less. - You can usually make personal contributions of up to 100% of your earnings in a tax year. If those along with any employer contributions (including bonus sacrifice) exceed £60,000 you may be liable to a tax charge. You also can't make a bonus pension sacrifice that results in your salary going below the National Minimum Wage. - Paying your bonus into your pension obviously means you can’t spend the money now e.g. on a holiday or new car, you have to wait until you can access your pension. |
While the benefits of bonus pension sacrifice appear really clear, there are a few things we think you should consider as your earnings and personal circumstances will probably have a bearing on whether you’ll want to do it.
How do I sacrifice my bonus into my pension?
If you’ve weighed up the pros and cons of bonus pensions sacrifice and have decided it’s right for you, it’s usually quite straightforward.
Firstly you’ll need to check that your employer is allowed to make payments into your plan. If they are then all you need to do is ask your employer in advance to pay all or some of your bonus into your pension.
If your pension plan won't allow payments from your employer, you can still pay it into your plan after it's gone into your bank account. Similarly, if you've already received your bonus and you decide later that you wish to pay it into your pension plan, it's not too late. Paying your bonus into your pension plan at this point does mean though you won't get the Income Tax and National Insurance savings, but you will still benefit from pensions tax relief. This is the government funded 'top up' on the pension contributions you make, meaning an extra amount is added to each payment into your plan.
Should I put my pay rise into my pension?
Before we get into the reasons for and against, it’s worth noting that if your pension contributions are a proportion of your salary each month (instead of a lump sum) then if your pay increases, your monthly pension contributions will as well. So you’ll automatically be paying more into your pension as a result of your pay rise. If on the other hand you pay a fixed amount into your pension each month, then you'll need to decide whether or not to increase that fixed amount.
Putting your pay rise into your pension is advice you’d be given by many finance and pensions experts – you’ll receive the tax and National Insurance benefits and you’re less likely to miss money you didn’t have before. But as is often the case, your personal circumstances have a huge bearing on if and when is the right time to increase your pension contributions. If you’re in the early years of paying a mortgage or raising a family you’re likely to have competing demands for any extra income and it might not be the right time.
But if you’re reaching a point where you can top up your pension – if you don’t need the extra income for living costs or are nearing retirement – then paying your pay rise into your plan could be really beneficial in the long run. A relatively modest increase in monthly contributions can have a dramatic impact on your pension pot when you retire. You can see for yourself using our simple pension calculator to model contributions and outcomes here.
Boost your pension before tax year end
For the majority of us, the most we or anyone else can pay into our pension each year before having to pay tax on contributions is £60,000. It’s called the pension annual allowance and it starts again every year on 6 April and runs until 5 April. So if we’re approaching the tax year end and you haven’t used your full tax-free allowance, then topping up your pension from your bonus could be a good idea.
On the other hand if you’ve nearly used your annual allowance and are worried that paying your bonus into your pension will take you over the limit, you can carry over any unused allowances from the last three tax years.
