Treat your bonus as income and you could find yourself losing most of it to tax. But pay it into your pension, as LFP client Nadia* did, and you’ll have the potential to keep all your money. 

Nadia’s story 

Nadia is Head of Sales for a successful Manchester-based e-commerce company. Her salary is £100,000. She and her employer pay 5% of her salary into her pension, and she has a target-based bonus amounting to a further £40,000. Her regular wage is more than enough to put her in the 40% tax bracket. If she were to take her bonus as regular income she would have to pay National Insurance contributions (NIC) and higher rate tax on all of it. Additionally, £100,000 is the threshold at which you start to lose your Personal Allowance. 

For every £2 of income above £100,000, Nadia would lose £1 of allowance. The effect would be dramatic. As the Personal Allowance gradually reduces to nothing where earnings are between £100,000 and £125,000, Nadia would effectively be taxed at a marginal rate of 60% (This is because in addition to paying up to 40% tax on any income above £100,000, there is the impact of losing some or all of the personal allowance and paying 40% tax on that income too as reducing the personal allowance by £1 for every £2 over the threshold means an additional effective rate of income tax of up to 20%). The result? If she were to take the £40,000 bonus as income she would actually keep just £18,200 of it. 

Naturally, Nadia was keen to protect more of the bonus she had worked hard to earn. 

The LFP solution 

The key to protecting more of Nadia’s money lay in keeping her taxable income below the crucial £100,000 threshold, thereby retaining the Personal Allowance. One powerful way of doing that is by paying all of the bonus into her pension. Yet Nadia’s bonus combined with her current pension contributions exceeded the annual allowance at the time of £40,000 that she can put into her pensions without incurring an income tax liability. It seemed that whichever route she took, Nadia was destined to pay some income tax on her bonus. 

However, Nadia’s LFP adviser suggested that they look to see if she could carry over some of her unused annual allowance from the three previous tax years, known as Carry Forward. We used a Carry Forward calculation to ensure the £40,000 contribution did not create a tax liability. 

Additionally, Nadia’s employer agreed to pay her bonus into her pension through Salary Sacrifice. This saved the company from paying national insurance on the bonus and her employer agreed to pass along all of this saving into her pension. 

Advice that delivered

Taken as income, Nadia stood to effectively lose £21,800 of her £40,000 bonus. Taken as a pension contribution, Nadia received £45,520 in her pension pot, which includes the NI saving passed on by her employer. 

From a major loss to a net gain, LFP helped Nadia and her employer to build Nadia’s pension without any additional cost to either party – and protect all of her bonus. 

Discover how LFP could help you keep more of the money you earn. Talk to us now. 

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances. 

*For privacy and security, we’ve not used Nadia’s real name. The advice provided was given after a full evaluation of her specific needs, circumstances and requirements.  The solutions provided would not be suitable for most investors and the information provided does not constitute advice.