This article was last updated on 04/12/2023
If you’re fortunate enough to receive a bonus on top of your salary, you might be wondering “are bonus payments pensionable” and whether it’s worth putting that money towards your future retirement.
In this article, we’ll look at the circumstances when paying a bonus into your pension is worth considering, when it may not be, and how you can do it.
Can I pay my bonus into my pension?
If you’re one of the 1.3 million people currently enrolled in a Defined Benefit pension scheme, you won’t be able to pay your bonus into your pension. This is because your retirement income is based on your salary and the number of years you work at your employer, rather than a pot that you pay into.
However, if you’re enrolled into a Defined Contribution pension - which is most people enrolled in workplace pension schemes - you do have the option of paying a cash bonus into it.
How do I pay a bonus into a pension?
You can pay a cash bonus into a Defined Contribution pension using a process called ‘bonus sacrifice’ (or ‘salary sacrifice’). It involves paying all or part of your bonus into your pension rather than receiving it in your bank account, just like a regular pension contribution.
You’ll need to instruct your employer to pay your bonus into your pension for you, as they won’t do this automatically.
Of course, you can receive your bonus into your bank account and then pay this into a pension. However, you’ll lose out on the tax savings offered by a bonus sacrifice.
What are the pros and cons of paying a bonus into your pension?
A major benefit of directing your bonus immediately to your pension is that it’s tax efficient - you don’t pay tax on pension contributions since it doesn’t count towards your income.
This can be particularly effective if you receive a large bonus or a bonus that pushes you into the next income tax band.
However, you can only contribute up to £60,000 or the equivalent of your annual salary into your pension each tax year (you might be able to pay in more if you ‘carry forward’ unused contributions from the previous three years), so you may need to bear this in mind if you receive a large bonus or already make large contributions.
You’ll also need to bear in mind that your bonus usually won’t count as income if it’s sacrificed to your pension. And that could affect the amount you’re able to borrow on a mortgage, since loan amounts are usually calculated as a multiple of your annual salary.
Since you won’t have to pay income tax on your bonus if it’s paid immediately into your pension by your employer rather than to you in cash, bear in mind that you won’t receive an additional 25% tax top up on your bonus contribution (unlike when you contribute money from your salary).
Additionally, any benefits that are calculated based on your salary could be impacted.
Paying a bonus into your PensionBee pension
Your PensionBee pension is considered a personal pension, which means you pay into it directly from your bank account - not from your employer. So your bonus can’t be sacrificed to a PensionBee pension.
However, if you’ve already received your pension and it’s too late to sacrifice it, you can put it into your PensionBee pension as a normal contribution.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
