If you receive a bonus payment as part of your income then, according to the Office of National Statistics, this made up 6.2% of your total annual pay in 2016/17, on average. As well as this:
“In the single month of March 2017, bonuses as a percentage of total pay reached 15.9%, the third highest since the Average Weekly Earnings (AWE) series began in January 2000”.
So it’s fair to say bonuses can make up a significant proportion of annual income. This money is often needed to cover essential annual expenses like holidays, home maintenance or World Cup tickets. Whatever happens, you can be assured it always goes somewhere.
What if you didn’t need it right now? Will it simply be topping up your cash accounts which are doing nothing for you?
How would a 40% top up on your bonus sound? This is where bonus sacrifice comes into play. If you can afford today to say “no, thank you” to even part of your bonus payment, the top up you get can be significant.
Firstly, most people will not pay National Insurance on the payment, saving up to 12%, your employer will not pay employer’s National Insurance on the payment, saving them 13.8%. By not having the money go through your PAYE, you will usually save a minimum of 20% tax on the contribution to your pension.
Put another way, a £1,000 bonus that goes through PAYE, will give you a take home amount of approximately £580 net of tax and national insurance for a higher rate tax payer. £1,000 sacrificed bonus, would put the full £1,000 into your pension making you £420 immediately. Your employer would save £138 by not paying Employers National Insurance, which makes them more likely to accommodate you. Some employers will even give some or all of this saving back to you increasing the benefit to your pension contribution.
Before deciding to take any bonus, consider what you are going to use this money for. I believe that the tax advantage of parking some of this money for the future, outweighs taking it all today. If managed in the correct way within your wider financial plan, then bonus sacrifice is a way of significantly increasing the reward for your hard work.
Through building a personal financial plan, with on-going advice and regular reviews, I help my clients maximise these opportunities and illustrate the significant impact small changes like this can have on their plans for the future.