What is bonus sacrifice? The basics

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

If you’re lucky enough to get a bonus from your employer, it’ll no doubt feel like a gratifying recognition of your hard work.  

What’s slightly less gratifying is seeing a good chunk of it swallowed up by tax and National Insurance. 

Bonus sacrifice allows you to forgo all - or part - of your bonus and pay it into your pension instead. This can reduce your tax bill and has the added benefit of helping your retirement savings to grow.

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How does bonus sacrifice work? 

Most people will simply have their bonus paid into their bank account as normal. This means income tax and National Insurance will be levied on it as it would on your regular salary.  

Alternatively, you can ask your employer to pay all or part of your bonus into your pension instead. This method means there would be no tax or National Insurance to pay and your pension pot grows too - as you get tax relief on any contributions you make too (up to the annual pension allowance).

• Learn about pension tax relief

Is it a good idea?

Paying into your pension is always a good idea, no matter when or how you do it. Having a large pension pot when you come to retire will help you to maintain the lifestyle you want to achieve. It’s also cost effective.

• Use our retirement calculator to see if you have enough to retire

Say you get a £5,000 bonus and are a basic rate taxpayer. If this is paid into your bank account you would need to pay £1,400 in tax, leaving you with £3,600. If you opt for bonus sacrifice, then the entire £5,000 would go into your pension.

There could be an added benefit if you’re close to a tax threshold. For example, if your salary is £48,000 and you receive a £5,000 bonus your income would be pushed above the threshold for higher rate tax.

Of course, if your pension is a defined contribution scheme then there is investment risk involved. The value of your pot could fall. You also can’t access the money until you are aged 55 (rising to 57 in 2028).

• Learn more about opening a self-invested personal pension

The flip side

Paying your bonus into your pension also means the money isn’t available now. You might have to put those holiday plans on hold. Similarly, it wouldn’t be counted as income when it comes to a mortgage or loan application.

More from our series:

• Read: What is volatility? The basics
• Read: What is the FTSE 100? The basics
• Read: Investing in cash in a Stocks and Shares ISA: the basics

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