How to keep more of your money 💷

Have you ever felt disappointed by the final amount on your payslip after receiving a bonus? 😩 Tax can often eat into a large chunk of your total pay as bonuses are taxed in the same way as your salary.

If you have any student loans as well, it would also be deducted out of your bonus amount.

However, there are ways to keep more of your money through something called bonus sacrifice. It’s what I am doing with mine and you should consider it too.

What is a bonus sacrifice? 📩

Just like with salary sacrifice, you could request your employer to put some or all of your bonus into your pension instead and defer paying tax on it.

It’s a great way to boost your pension savings and legally pay less tax. Who wouldn’t want that?

By choosing bonus sacrifice you could keep 100% of your money, but as it would go into your pension, you wouldn’t be able to access it for a while. It’s called sacrifice to a reason!

How much can you save? 💰

It depends on your total earnings including the bonus, but here is how we are currently taxed in the UK on qualifying earnings:

• £0 to £12,570 - 0% 

• £12,570 to £50,270 - 30% (20% tax plus 10% national insurance)

• £50,270 to £100,000 - 42% (40% tax plus 2% national insurance)

• £100,000 to £125,140 - 62% (60% tax plus 2% national insurance)

• £125,140 and above - 47% (45% tax plus 2% national insurance)

For someone earning £50,270 yearly and receiving a bonus of £5,000, they would end up paying £2,000 in income tax and further £100 in national insurance. This would only leave them with £2,900 after paying tax - not a great deal.

What happens if you put this money into your pension? Not only you would keep all of the money, but if invested well, this money could grow and compound over the years.

Assuming a 7% inflation adjusted returns, in 25 years £5,000 could be worth £28,627* 📈.

To compare how much £5,000 bonus could result in:

• If you take your bonus now - you would receive £2,900

• If you sacrifice your bonus into a well invested pension, in 25 years you could have £28,627.

• A potential difference of £25,727! 🚀

Some companies may also agree to add their national insurance savings onto your pension, but you should check if this is something your company does.

Overall, bonus sacrifice is one of the most tax efficient ways to save for your future and could help boost your pension considerably.

My weekly recommendation

Making Money Podcast have released a brilliant episode with a pensions expert Tom McPhail discussing various aspects on why we need to get very serious about our pensions.

Highly recommended episode! If you prefer to listen instead, here is the link to Spotify.

Want to support me? You can buy me a coffee here ☕

Until next time ✌️

Lina at Money Blues