Case study
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The following example shows just how much difference a bonus waiver can make to the size of your pension plan compared with investing a net amount from your bonus.
Mike Smith is aged 42 and wants to retire at 65. He has a total annual income of £120,000 and is due to receive a bonus of £25,000 from which he would like to invest £20,000 in his pension plan. There are two ways he could approach this:
- Option 1 – Receive the bonus as taxed pay and then invest the net amount into his pension plan.
- Option 2 – Waive the bonus in return for his employer investing this amount into his pension plan.
|
Option 1 – investing net bonus into pension |
Option 2 – Bonus Waiver |
Bonus intended for pension |
£20,000 |
£20,000 |
Net pay after 40% income tax and 2% NIC |
£11,600 |
n/a |
Personal ‘net’ amount invested into a pension |
£11,600 |
n/a |
Tax relief at source on ‘net’ investment at 20% (2011/12) |
£2,900 |
n/a |
Gross amount invested into pension (2011/12) |
£14,500 |
£20,000 |
Tax relief via self assessment at 20% (2011/12) |
£2,900* |
n/a |
Total Benefit |
£17,400 |
£20,000 |
*Client has the option to reinvest this amount into the SIPP when it is received. It is assumed in this example that the client will not reinvest this amount in the SIPP. It is assumed in this example that the client will not reinvest this amount in his SIPP.
Under Option 1, and as a higher rate taxpayer, Mike could claim an additional £2,950 in tax relief at 20% via self assessment, which he could reinvest back into his pension plan. However, it would take 5 years or more to reinvest in this way, which would not only be a time consuming process, but could also mean a lost investment opportunity.
 Bonus sacrifice |
