Workers receiving a bonus this year could boost their pension by thousands of pounds by using bonus sacrifice – but a planned rule change in 2029 means the current National Insurance savings will not last forever.
Workers receiving a bonus this year could boost their pension by thousands of pounds by using bonus sacrifice.
Hargreaves Lansdown says workers who receive a workplace bonus could significantly increase their retirement savings by using a little-known scheme known as bonus sacrifice. The arrangement allows employees to give up part – or all – of their bonus in exchange for an employer pension contribution.
Because the money never hits your payslip, you do not pay income tax or National Insurance on it. That means more of your bonus goes straight into your pension pot rather than to HM Revenue and Customs (HMRC).
Instead of receiving your bonus in cash, you agree with your employer that some or all of it will be paid directly into your pension. This means you benefit from income tax relief, National Insurance savings and a bigger pension contribution from the outset.
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Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Bonus season is well under way and if you are lucky enough to get one you are probably thinking of what you can do with it.
“One of the best ways you can get the most out of this money is to see if you can make use of a bonus sacrifice arrangement.”
How much could you save?
The savings can be substantial.
Example: Basic rate taxpayer:
- Salary: £40,000
- Bonus: £5,000
- Income tax at 20%: £1,000
- National Insurance at 8%: £400
- Total lost to tax and NI if taken in cash: £1,400
If the £5,000 bonus is sacrificed into a pension instead, the full amount goes into your retirement pot.
Over time, these larger contributions – plus investment growth – can make a meaningful difference to retirement income.
Avoiding tax traps
Bonus sacrifice can also help workers avoid creeping into higher tax bands.
If a bonus pushes earnings above the higher rate threshold, sacrificing part of it could keep taxable income below that level.
It may also help families avoid the High-Income Child Benefit Tax Charge. Parents earning over £60,000 begin to repay Child Benefit, and those earning £80,000 or more must repay it in full. Reducing taxable income through pension contributions can keep families below those thresholds.
Change coming in 2029
There is, however, a deadline on how generous the rules will remain. From April 2029, National Insurance relief on pension contributions made through salary or bonus sacrifice will be capped at £2,000 per year.
That means higher earners who currently benefit from larger NI savings will see the advantage reduced.
Ms Morrissey said while the rule change is a few years away, workers still have time to take advantage of current arrangements.
Is it right for you?
Bonus sacrifice is not available everywhere – it depends on your employer offering the scheme.
You also need to consider:
- Whether you need the cash now
- Your annual pension allowance
- How it fits with your wider financial goals
If you can afford to lock the money away until retirement, sacrificing a bonus can be one of the most tax-efficient ways to build long-term wealth.
If you’re getting a bonus this year, it’s worth checking with your HR department before the money hits your bank account – because once it’s paid in cash, the tax is already gone.
Pension salary sacrifice in a nutshell
What is it?
- A scheme where you give up part of your salary or bonus and your employer pays it into your pension instead.
Why is it popular?
- You currently avoid paying Income Tax and National Insurance on the sacrificed amount.
What changes in 2029?
- From April 2029, National Insurance relief will only apply to the first £2,000 per year of pension contributions made through salary or bonus sacrifice.
What stays the same?
- Income Tax relief on pension contributions will still apply.
Who is most affected?
- Higher earners and workers sacrificing large bonuses or contributions above £2,000 a year.
