If you’re a high earner, then it’s likely that you receive a basic salary as well as bonus payments. If you want to save money on tax and boost your pension pot, then you might want to consider a bonus sacrifice.
How to Avoid Paying Tax on Bonuses in The UK
A bonus sacrifice is the most tax-efficient way of paying money into your pension pot. It gives you an instant tax saving, as you are not taxed on the amount that you put into your pension scheme. Instead, you are only taxed on the income you receive and you will also save national insurance.
This could result in a significant tax reduction, especially if you are in the higher tax bracket as you are taxed 40% on anything that you earn over £50,000. So, if you were one of the many few wondering “How to Avoid Paying Tax on Bonuses in The UK”, this might just be the solution for you.
What is Bonus Sacrifice?
A bonus sacrifice is when you choose to have some or all of the money from a bonus paid into your pension pot rather than directly into your bank account.
Bonus sacrifice is fairly straightforward:
- Your employer notifies you of your upcoming bonus.
- You decide how much you want to put into a pension.
- You tell your employer how much of your bonus you want to sacrifice.
- Your employer pays this amount into your pension pot.
- Tax relief is applied automatically, meaning you don’t need to do anything.
If you have already received your bonus, then you still have the option to pay some of it into your pension pot to reduce your tax bill.
Income Tax Rates
The following statistics show the rates and bands for income tax in the UK.
- Personal Allowance: Any income of up to £12,570 has a 0% tax rate.
- Basic Rate: Incomes of £12,571 – £50,270 work out at a 20% tax rate.
- Higher Rate: Incomes of £50,271 – £125,140 equal a 40% tax rate.
- Additional Rate: An income of over £125,140 result in a 45% tax rate.
How Are Bonuses Taxed in the UK?
Generally speaking, bonuses are taxed at a basic rate in the same way as your salary. According to uktaxcalculators.co.uk: “If you receive a bonus from work on top of regular salary then you are liable to income tax, national insurance and other deductions on the additional income.”
If you earn over £50,000 and you receive a bonus of £10,000, then you will pay income tax at 40% and national insurance at 2% on the bonus. The easiest way to avoid paying this tax is to sacrifice your bonus into your pension pot.
What is the Benefit of Bonus Sacrifice?
The biggest benefit of a bonus sacrifice is that you can avoid paying tax and national insurance on your bonuses. This can lead to significant savings, particularly if you are on a higher income.
For example, if your salary is £52,000 and you receive a £10,000 bonus, then you will pay £4,000 in tax and £200 in national insurance. This means you will only receive £5,800. Whereas, you will receive the full £10,000 if you put the money into your pension. In addition, your employer won’t have to pay any NIC if the bonus is paid into your pension.
The biggest benefit of a bonus sacrifice is that you can avoid paying tax and national insurance on your bonuses. This can lead to significant savings, particularly if you are on a higher income.
For example, if your salary is £52,000 and you receive a £10,000 bonus, then you will pay £4,000 in tax and £200 in national insurance. This means you will only receive £5,800. Whereas, you will receive the full £10,000 if you put the money into your pension. In addition, your employer won’t have to pay any NIC if the bonus is paid into your pension.
Bonus Sacrifice for High-Income Earners
High earners can benefit the most from bonus sacrifice and the tax savings can be massive. However, you need to check the Tapered Annual Allowance carefully as you could face a huge, unexpected tax bill if you get it wrong.
There are restrictions on how much you can put into your pension each year. The general rule is that you cannot put more than 100% of your earnings or £40,000 (whichever is less). However, high earners (earning more than £200,000) might be affected by the tapered annual allowance which limits how much you can put into your pension tax-free.
There are a few things that you can do to avoid the tapered annual allowance: Pension carryforwards, ISAs, and Venture capital trusts. You can visit GOV.UK to check your tapered annual allowance.
How is Bonus Sacrifice different from Standard Pension Contributions?
Regular pension contributions are paid from your after taxed income, meaning you pay income tax and national insurance at the standard rates. Whereas, bonus sacrifice is money paid into your pension from a bonus and is tax-free.
Standard pension contributions are typically deducted from your monthly salary and automatically transferred into your pension pot. On the other hand, bonus sacrifice is only paid into your pension scheme when you receive a bonus and choose to sacrifice some of the money.
Book your Consultation today
Our independent financial advisors have the skills and expertise to provide you with the best tax-saving advice. We can help you implement a tax-efficient strategy for your bonuses that will maximise your pension and achieve your final salary pension goals.
Book a consultation today to discuss your finances and get tax planning advice.
