Is it worth putting my bonus into my pension?

Give your pension a boost from your bonus

If you’re enrolled in a workplace pension, the money in your pot is usually built up through contributions taken automatically from your salary (along with any additional contributions from your employer).

However, if you’re lucky enough to receive a work bonus, you can ‘sacrifice’ some of this to your pension to further increase your retirement savings. Here, we’ll walk you through how you can do this, what the benefits are, and whether bonus sacrifice is right for you.

The benefits of bonus sacrifice

The main benefit of paying your bonus into your pension is tax relief.

If you take your bonus as cash, this will be subject to income tax, National Insurance contributions and maybe other deductions (such as student loans). However, if you put a bonus into your pension, this money won’t be taxed because it’s considered as a pension contribution. For example, if you pay a £3,000 bonus into your pension, the full £3,000 will be added to your pension pot.

You can also choose to take your bonus as cash and then pay it into your pension later – but you’ll miss out on some of the tax relief you’d receive through bonus sacrifice.

How to put your bonus into your pension

The first thing you’ll need to do is check you’re a member of a defined contribution (DC) pension. A DC pension is a scheme where you and/or your employer add money into your pension pot and your money is invested over time (most workplace pensions today are now classed as DC schemes).

If you’re part of a DC scheme, you can then ask your employer to pay your bonus into your pension.

Should I put my bonus into my pension?

If you can, putting your bonus into your pension can be a smart way to grow your pension pot. That’s because a bonus paid straight into your pension is usually not treated as income – so the full amount goes in without being taxed.

However, it’s worth keeping in mind that if you do this and later apply for a loan or mortgage, lenders will typically base their decision on your regular salary — not the boost your bonus could have given you.

If you take your bonus as part of your salary instead, it will be taxed like normal income.

With the rising cost of living, taking your bonus as cash – instead of adding it to your pension – may seem like an easier way to support your take-home income. If you’re thinking about making extra pension contributions but have any financial concerns, read our guide to paying into your pension when times are tough.

Our retirement planner is also a useful way to find out if you’re on track to live the retirement you want. It can help you to work out how much money you may need and could have in retirement. View the retirement planner in your account.

Be aware of your annual allowance

When making contributions into your pension, there’s a limit to how much you can put into your pot in a tax year – this is called the annual allowance.

If you go over this limit, you’ll receive a tax charge. But in some cases, you can use unused annual allowance from the previous 3 tax years to reduce this tax charge.

If you’ve already started taking money from your pension savings, then the limit on contributions is a bit different. This is known as the Money Purchase Annual Allowance.