Bonus sacrifice

If you receive an annual bonus you might baulk at the amount of tax you pay on it. Often there’s emergency tax to pay and even when that’s been sorted out, you might still be down 40 or 45 percent. For higher rate taxpayers, a £10,000 bonus will be reduced to £5,800 by income tax and national insurance. If the bonus increases total income to between £100,000 and £125,140 for the tax year there will be loss of personal allowance which equates to 60% tax on that element.

Many people see their annual bonus as a chance to treat themselves, clear some debt, or build savings.

But increasingly, employees are choosing another option, which is paying some or all of their bonus into their pension through bonus sacrifice.

This approach can reduce the tax you pay on your bonus and potentially increase the amount invested for your future financial wellbeing.

But from 2029, National Insurance rules will change, so it’s important to understand how the current rules work and what is coming next.

What is Bonus Sacrifice?

Bonus sacrifice is when you agree with your employer that all or part of your bonus will be paid into your pension as an employer pension contribution, rather than being paid to you as salary.

Under current rules (2026): You save Income Tax and National Insurance (NI) on the portion of bonus sacrificed

Your employer may also save NI and can choose to add this saving to your pension

The full value of the sacrificed bonus is paid into your pension but it’s important to note that pension values can fall as well as rise, and you may get back less than you invest.

Current Tax Position (2026)

Under today’s rules employer pension contributions via bonus sacrifice are exempt from employee and employer National Insurance.

All pension contributions made through bonus sacrifice receive full Income Tax relief within annual allowance limits.

What’s Changing from April 2029?

From 6 April 2029 it is proposed that only the first £2,000 per year of pension contributions made through salary or bonus sacrifice will continue to be exempt from National Insurance.

Any amount sacrificed above £2,000 will be subject to employee and employer NICs. This could be adjusted before 2029 though, as amendments are debated in the House of Lords.

Tax treatment depends on individual circumstances and may change.

Why Consider Bonus Sacrifice in 2026?

Bonus sacrifice can help reduce Income Tax and NI on your bonus, boost your pension pot, and protect valuable allowances.

Pension contributions can reduce Adjusted Net Income and restore allowances such as Personal Allowance, Child Benefit, Tax-Free Childcare, and others.

Example

Maria earns £70,000 and receives a £10,000 bonus.

If paid as cash she would receive £5,800 after tax and NI.

If she sacrifices the bonus the full £10,000 goes into her pension and her employer may add their NI saving too.

Is Bonus Sacrifice Right for You?

Bonus sacrifice may help boost retirement savings and reduce your tax bill, but it may not be suitable if you need the cash or risk exceeding your Annual Allowance

This is not personal advice. Speak to a financial adviser if you’re unsure.

If your £10,000 bonus went straight to your pension pot, your net income would be:

This method gives you the opportunity to extend your tax band and could save you paying higher levels of tax.

Other advantages

Employers NI on a Bonus is 15% and some employers may pass all or part of the Employer NI saving into the contribution as well. This means a £10,000 bonus could be uplifted to as much as £11,500 depending on how much Employer NI saving the employer is willing to give up. A discussion with your employer should quickly establish an outcome here.

How Bonus Sacrifice can affect tax and other benefits

As bonuses are treated as income, they can also affect your eligibility for other benefits. Statutory benefits like maternity or sickness pay have no means-test, but do have specific income rules to check eligibility. Your bonus could affect any salary-related benefit, such as:

Saving for the future

We’ve mentioned some of the benefits of Bonus Sacrifice, but it’s important to remember that you cannot access pension funds until you are aged 55 (or 57 from 2028). Using bonuses in this way could also potentially impact upon any benefit entitlement or lending affordability. For example, bonus sacrifice may affect how much you’re able to borrow through a mortgage. However, some lenders may take your salary before Salary Sacrifice into account, rather than your lower salary and may consider pension contributions too.

There’s no limit on how much you can save into your pension each year – but there is a limit on how much you can contribute tax efficiently. One aspect is your annual allowance (currently £60,000) – this includes pension contributions from all sources including your employer and if exceeded means a tax charge applies to the excess. But if you have any unused Annual Allowance from the previous 3 years, you may benefit from Carry Forward allowance, as long as you had a pension in place in those earlier years. In addition to the annual allowance, there is also a limit on just your own pension contributions – they will only receive tax relief as long as they don’t exceed 100% of your earnings (or £3,600 if more).

For those with a total income exceeding £100,000 per annum, the Personal Allowance is tapered and lost altogether when total income exceeds £125,140, resulting in an effective tax rate of 60% in that range. In this case contributing to a pension with any bonuses could help keep your income below ANI of £100,000, as an instant way of reducing your tax bill.

Sounds complicated? Pension allowances and income tax can be confusing, and more so with the Tapered Annual Allowance. For those with a total income of over £200,000 per annum – and certainly those with total income in excess of £260,000 – the Annual Allowance reduces from £60,000 to £10,000.

Benefit of compounding

If you do choose to use Bonus Sacrifice, not only do you save tax and national insurance but benefit from compounded returns on these monies and tax efficient growth. Giving your pension funds as long as possible to benefit from growth can make a real difference – even making contributions at the beginning of the tax year rather than at the end can help.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.