With many company bonuses being paid in Q1, we look at the benefits of Bonus Sacrifice, which could help employees receive 100% of their bonus rather than giving up a portion to the tax man.
- Do you have a company bonus?
- Did you know a bonus can be saved into a pension, as well as monthly payments?
If you run your pension scheme using Salary Sacrifice, or Salary Exchange as it’s sometimes called, and you want to help your employees get the value of their full bonus this year, read on.
The basics – How does Bonus Sacrifice work?
For an employee, the initial benefit is straightforward. Because the amount of National Insurance (NI) paid is linked to earnings, then reducing salary or bonus in exchange for an increased employer pension contribution, means the employee pays less national insurance (as well as reducing the amount of their earnings that are subject to tax).
Additionally, employers’ NI is not paid on the amount in question, and some employers may decide to share the benefit of this with their employees, to further enhance their pension contribution.
This site will help you understand your new workplace pension plan. Please remember your pension is an investment so its value can go down as well as up and you may get back less than was paid in.
- Please note that tax rules may change and this is our understanding in January 2018.
Getting the message right
Bonus time brings great excitement to your employees and workplace, so you might think letting your workforce know they could save it into their pension as well as spend it, would fall on deaf ears. But let’s look at the benefits of your employees thinking about putting some or all of their bonus, into their workplace pension:
They’ll get the full value of their bonus – maybe more
- Taking the money means losing at least 20% of their bonus in tax and NI, depending on the employee’s circumstances. Bonus Sacrifice allows your employees to get their entire bonus.
- If you share the employer NI savings, employees could save more into their pension than their bonus amount. This is a powerful message, and here’s an example you could use to bring the concept of Bonus Sacrifice to life:
Tom gets a £1,000 bonus but decides he wants the cash, and gets the end benefit of £680. Tom’s bonus has tax and NI deducted before it’s paid into his bank account. The total deductions amount to £320, leaving Tom with £680.
Mary also gets a £1,000 bonus. She sacrifices the whole lot and gets the end benefit of £1,138.
Mary chooses to save her bonus into her pension by sacrificing it for an employer pension contribution. As the bonus is given up before tax and NI is deducted the whole £1,000 will go directly into her pension. And because Mary’s employer won’t pay £138 NI on those earnings, they decide to pass on that saving and top up Mary’s Bonus Sacrifice, giving her a total of £1,138 going into her pension pot.
In these two simple examples, Mary and Tom have received the same bonus and have the same tax details. But because they made different choices, Mary’s decision to sacrifice her bonus into her pension meant that in true value terms, she got £458 more than Tom.
Bonus Sacrifice will boost their pension pot
- With people living longer, your employees need to make sure they have enough saved for an adequate standard of living in retirement, for longer than they think.
- Using a bonus to make a one-off payment into a pension could be especially useful for those who feel they can’t afford to increase their monthly contributions.
Their future selves will be glad they saved and didn’t spend
- Saving bonus into a pension, rather than spending it now, means your employees could be reaping the rewards investment growth can bring, long after the glow of any holiday or hitting the shops, has faded away.
Maximising personal tax allowances
- For higher earners who regularly save more, Bonus Sacrifice is attractive, enabling them to make the most of saving tax efficiently and maximising their Annual Allowance.
Bonus Sacrifice lowers earnings levels
- For those employees earning near the higher end of their current tax band, sacrificing more salary or bonus into their pension before tax, lowers taxable earnings, potentially keeping them out of a higher tax band.
The potential benefits of Bonus Sacrifice for your employees is clear, but there are some considerations too.
Your employees need to be aware their pension contributions are invested in the stock market, therefore the value of their investment can go up or down, and may be less than was paid in.
Other key messages they need to be helped to understand are that tax rules can change and the tax they pay will depend on their personal circumstances. Lastly, that Bonus Sacrifice isn’t right for some people and if they’re unsure whether it’s right for them, they should speak to a financial adviser and there may be a cost for that.
Deciding whether to save or spend their bonus starts with employers letting their workforce know that Bonus Sacrifice is available.
If you would like to help your employees get the most out of your company bonus, planning is key. Give your Payroll team as much time as you can to plan this activity in, and take time to think about your messaging – what will work best for your workforce.