Why saying no to your bonus could be a benefit
Many companies choose to pay their employees an annual bonus in March or April.
However, saying no to all or a part of your bonus (bonus sacrifice) in return for an employer pension contribution before the tax year end, could be far more beneficial in the long term.
Your pension funding will be boosted by the employer by the additional payment. Plus, the National Insurance savings made by both employer and employee could be added.
This gives you more in your pension pot for every £1 lost from take-home pay.
Salary Sacrifice
In order to obtain tax relief on your bonus payment, the ‘sacrifice’ rules need to be followed. Salary sacrifice is an agreement with your employer to a reduction in your salary or bonus, in exchange for an alternative financial benefit.
Salary sacrifice permits employees and business owners to maximise the tax relief on pension. The employee will also receive full tax relief at their top rate of tax on the contribution. And, depending on individual circumstances, this could be an effective rate as high as 60%.
The employer determines a salary sacrifice arrangement by changing their employee’s contract. Contracts must be clear on what the cash and non-cash entitlements are for the employee, who can choose to opt in or out of the arrangement.
Therefore, it is really important that you agree the salary sacrifice arrangement with your employer, before your bonus is paid.
Pension Planning
If you are worried that you are too late to start saving for your retirement, bonus sacrifice might be the solution to give it a boost.
For example, if you were to sacrifice your £10,000 bonus straight into your pension, you would not pay any tax or National Insurance on it.
Your employer would save 13.8% on National Insurance payments too. This employer saving is often passed on to you, the employee, as part of the arrangement. The result being a total pension contribution of £11,300.
However, if you choose to have your bonus as pay, you would be charged National Insurance and tax on it. At the higher rate of tax (40%) this takes the £10,000 bonus down to just £5,800 cash received, compared to £11,300 in your pension.
Don’t delay and don’t lose out. Call the pensions experts at Innes Reid on 01244 347583 to start using pension salary sacrifice today.
Chartered Financial Planner (APFS)
Mark has been working in the Financial Services sector since 1990. After qualifying as a Financial Adviser, he worked for a large North West based IFA for almost 7 years before founding Innes Reid Investments Limited in 1999.
Since its foundation, Innes Reid Investments has grown to become one of the leading IFAs in the North West and one of the Top 250 IFAs in the UK as listed in The Times. Mark specialises in a wide range of financial services including, but not limited to: Pensions, Inheritance Tax Planning, Wealth Management and Tax Year End Planning. View full profile >
