A seasonal bonus for pensions?

The tax year end can focus the mind. Particularly with regard to pension funding – if allowances are not used now, they may be lost forever.  But where can you find the ‘cash’ to top-up your pension?

One solution may be to use any year-end bonus payments.

March is traditionally bonus season for many companies and this can assist with an individual’s desire to make the most of their unused pension allowances. And if your employer gives the option of making a pension contribution using bonus sacrifice, the boost to your pension could be worth nearly double the net amount you’d get if you took the bonus as cash.

The total bonuses paid in 2016/17 were £46.4 billion1 – an all-time high. And over half of these are paid in the period between December and March. Bonuses are obviously very welcome, but the timing of them and the fact that in certain business sectors they can account for more than a fifth of total pay, can make tax planning difficult. A large bonus can even push income over certain thresholds, meaning key allowances and benefits could be lost. Contributing to a pension can solve these issues, while at the same time building up your retirement pot.

How does bonus sacrifice work?

Bonus sacrifice is actually quite simple. For pensions, it involves the employee agreeing to give up some or all of their bonus in return for an extra employer contribution to their pension.

As the employee's remuneration is reduced, they and their employer will pay less NI. The employer could pay their NI saving into the employee’s pension too – overall, it won't cost them any more than paying them a bonus.

For example, Maria is 45, earns £60,000 a year and is due to receive a bonus of £10,000. After tax at 40%, and NI at 2%, Maria would only receive a £5,800 bonus in her hand. And, with employer NI on top, it cost her employer £11,380 to provide.2

If Maria sacrifices her bonus in exchange for a pension contribution from her employer, the full £10,000 goes straight into her pension (without any need to reclaim higher rate tax relief).

What's more, her employer may be willing to pass on their NI savings too, leaving them in a cost neutral position. This would add a further £1,380 to her pension contribution. So the extra £5,800 she could have had in her hand is worth £11,380 in her pension.2

To illustrate the benefit of forgoing the bonus:

  • If Maria took £11,380 from her pension at retirement and was still a higher rate taxpayer, she’d receive a tax free amount of £2,845 with the balance of £8,535 being taxed at 40%, leaving £5,121. This adds up to £7,966 – over 37% more than taking the bonus.2
  • If she was a basic rate taxpayer in retirement, as roughly six out of seven working higher rate taxpayers are3, the total would be £9,673 – over 66% up on the bonus alternative.2
  • And these figures ignore any investment growth. Of course, the fund is enjoying tax free investment growth while invested in the pension.

The NI savings for basic rate taxpayers are even greater as they pay NI at 12% on income over £8,424. So they effectively get 32% tax relief on pension contributions paid by sacrifice.2

The benefits of bonus sacrifice do not stop there. The reduction in income can mean that child benefit or personal income tax allowances aren’t lost.

Avoiding the child benefit tax charge

Child benefit can be taken for granted. But it can also be taken away. Where someone in the household earns more than £50,000, the benefit begins to be withdrawn by way of a tax charge – with child benefit being cancelled out completely for those on £60,000+. This could mean losing out on £2,501 for a family with three children.

A bonus paid late in the tax year could mean the total income tips over the £50,000 threshold. The solution could be as simple as making a pension contribution as this reduces the income used to determine eligibility.

Eliminating the child benefit tax charge effectively increases the tax relief on your pension contribution. And if the contribution is funded using salary (or bonus) sacrifice, with the employer NI saving reinvested in the pension, the results will be boosted further.

Just look at the effective tax relief on a £10,000 gross pension contribution by an individual with annual salary of £50,000 and a year-end bonus of £10,0002:

Number of children





£10,000 contribution





£10,000 sacrifice

(£11,380 contribution4)






Retaining personal allowances

In the same way, a larger than expected bonus could mean indiviudals miss out on their personal allowance. The allowance is eroded once income is greater than £100,000, until there's no personal allowance at all for anyone with income over £123,700. A pension contribution can help individuals bring their income back down below £100,000 a year to retain their personal income tax allowance.

Someone with total income of £123,700 could get effective tax relief of 60% on a pension contribution of £23,700. This would be just enough to retain their personal allowance. That’s 40% tax relief on the £23,700 going into their pension and a further 20% by getting their personal allowance back. And of course, this can be boosted further by NI savings if it can be achieved by bonus sacrifice. 


A bonus is often the final piece of the remuneration jigsaw. Only after the amount is known will the full income picture for the year become clear. Bonus sacrifice is only possible before the bonus is received (and if the employer allows it). And time is of the essence if those key thresholds have been breached with the tax year looming.


1 Source: Office for National Statistics bulletin on average weekly earnings and bonus payments in 2016/17. (This is still the latest release – ONS)

Based on main UK tax rates and allowances: not Scotland.

Source: Centre for Policy Studies – ‘Five proposals to simplify saving’ (August 2018)

Assumes employer NI saving is added to pension contribution.


This guide is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication.

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