Bonus sacrifice

Bonus sacrifices occur when you make a contractual agreement with your employer to waive all or part of your bonus. In return, your employer contributes a “preferential” (equivalent) sum into your pension plan.

 

How does it work?

• For a bonus sacrifice (also sometimes known as a “bonus waiver”) to be effective, it must be ‘given up’ before it is subject to tax or National Insurance Contributions (NICs). This allows you to save the entire amount of your sacrificed bonus in your pension plan free of tax and NICs
• Bonus sacrifices also save your employer money, as they do not have to pay NICs on your sacrificed bonus. If your employer passes some or all of these savings on to you, you will benefit from even larger tax and NI-free contributions at no extra cost
• For these reasons, bonus sacrifices can significantly enhance the long-term value of your pension plan, as well as allowing you to enjoy considerable savings
• However, bonus sacrifice may not be appropriate for individuals with total income of £150,000 or more in any tax year from 2007/08 onwards, as – in accordance with new pensions tax relief regulations for high earners – any amount of employment income foregone by bonus sacrifice in return for an equivalent pension contribution on or after 22 April 2009 will be considered relevant income and could result in the application of a “special annual allowance charge” that reduces the tax relief available
• Bonus sacrifice arrangements entered into prior to 22 April 2009 will continue to have the effect of reducing an individual’s income for the high earner test. However, the extra amounts contributed as a result of the sacrifice will still be subject to the special annual allowance charge if an employee’s income, despite the sacrifice, remains above £150,000.

What are the benefits?

 

You save Income Tax on earnings - You will not pay any income tax on the bonus you elect to give up in exchange for an employer contribution into your pension plan.

You save National Insurance contributions - You will not be subject to any National Insurance on that part of your bonus that you agree to give up in exchange for an employer contribution into your pension plan.

You gain an increased pension contribution - Your employer will not be subject to any National Insurance on that part of your bonus that you agree to give up in exchange for an employer contribution into your pension plan. Most employers are willing to pass on part of this saving to enhance the contribution into your pension.

You benefit from simplicity - The completion of a few simple forms passes all the administration onto your employer and the pension provider. You do not need to apply to HMRC to register the transaction, nor do you have to record it on your Self Assessment tax return.

 

Issues to consider

Important information

You need to bear in mind that bonus waiver can have possible impacts on borrowing levels, such as mortgage borrowing, credit card and personal loan limits, Income Protection Insurance benefits and redundancy entitlement and UK State Benefits.

 

Important note for individuals of foreign domicile

If you are resident in the UK but not domiciled in the UK there could be specific issues that apply to you depending upon pension and taxation laws in your country of domicile. This is particularly relevant for US domiciled individuals. In order to determine whether Bonus Sacrifice is suitable for you we recommend that you obtain professional advice from your tax adviser to understand taxation and pension legislation in your own country can affect your tax position, repatriation of how pension assets, transfer and drawdown of the pension. You also need to be aware of how exchange rate risk could affect you if you decide to draw your pension income in a non Sterling currency.

 

Barclays does not provide tax advice nor can it advise on international pension issues and you should seek your own advice in this regard where appropriate.

This information is based on our understanding of current legislation, taxation law and HM Revenue & Customs (HMRC) practice, which may change in the future. Tax treatment depends on individual circumstances and may be subject to change in the future.

 

Salary sacrifice

 

Bonus sacfrice case study