Your bonus or the taxman’s? Get your Christmas bonus working for you
It’s Christmas bonus season! What a treat I hear you say – You’ve already put the down payment on that dream swimming pool in the back garden (what, In Scotland!? Okay bear with me here). On comes bonus day and what do you get – a 1-year membership to the ‘Jelly of the Month’ club. See the classic 1989 film ‘National Lampoons Christmas Vacation’ to see how that one turned out!
Thankfully, I like to think we have much more forgiving employers in today’s environment so hopefully you can expect at least some bonus this Christmas time.
Key points
Your Christmas bonus is treated as income and is subject to Income Tax and National Insurance, just like your monthly salary would be.
For many this may mean you will be subject to taxation at 40/45% on that bonus as you breach the tax threshold.
If you have paid more taxation than you theoretically should have, you’ll receive a tax rebate via PAYE, or at the end of the tax year (this usually happens automatically).
But Keith, I don’t want to pay all that tax on my bonus. Are there any clever ways around this? Well there is one option:
Bonus sacrifice
If you wish you can elect for your bonus (or a portion of it) to be placed directly into your pension scheme with no immediate taxation payable. For example, a bonus of £10,000 could be placed directly into your employer pension. The whole £10,000 will then be invested for your future retirement. How tax efficient is that!
Of course, we’re practicing ‘delayed gratification’ here – something that two-year-old child inside us is pushing against with that craving for the marshmallow now, rather than a bag full later.
We do all work hard year after year and it’s important to celebrate the wins now, as well as plan for our futures. Sure, placing the full amount in your pension gets you the most bang for your buck, but there is definitely a balance here.
My suggestion – Put aside 10-20% into your pension and give your long-term savings goals a real kick in the right direction. Whatever you have left over, build up your cash savings for the unexpected in life if you haven’t already (3 – 6 months’ worth of expenses works well) but perhaps most importantly be sure to keep enough left over for you to enjoy it now. It’ll make all those long months at the coal face seem that bit more worthwhile.
Happy Spentwell Christmas.
Keith
Spentwell.
PS Just like those snowflakes falling from the sky, you are unique, thus see this as guidance only and always seek advice from a qualified professional if in any doubt.