Can I put part of bonus into pension to save tax?

pealy

Not sure if this is a tax or a pension question so I'm going to post it in both forums.

It's looking possible that I might qualify for a bonus this year and rather than take a 40% tax hit I'm wondering whether it's possible to have part of it paid into my pension 'tax free'. If it is awarded it will probably arrive in the next few weeks so have I left it too late to do anything?

Any advice appreciated.

MrChips

The answer to this depends on your pension arrangements with your employer. If you are in a defined benefit scheme, then you will need to contact your pensions department and ask them to arrange for this to happen, either into an AVC fund, or (if your scheme allows) into the main fund in return for defined benefits (eg added service/fixed pension at normal retirement age).

If you have a defined contribution scheme, you will need to again contact your pensions department and ask them to pay your bonus into your fund.

In theory this should be possible but in practice your HR department will need sufficient notice. There are a few technicalities to be aware of. In this tax year, you cannot contribute more than 15% of your gross salary to your pension and continue to receive generous tax relief. If your bonus will take you over this limit (in combination with any standard contributions during the year) then you could ask if your employer will do a “bonus waiver” whereby they don’t actually pay you a bonus and instead make an equivalent payment on your behalf to your pension (similar to the salary sacrifice loophole).

If you are a very high earner, you will also need individual advice as to whether this bonus payment will put you into conflict with the new Inland Revenue limits in force from 6 April 2006 and whether you should consider at least one of the forms of protection they are offering in transition between the two systems.

While paying your bonus into your pension will save you from tax now, of course you will have to pay tax on (at least) some of it when you start to receive you pension, although for most people this would be lower as you can take 25% of your benefits as a tax free lump sum and the residual pension will (almost certainly) be lower than your salary before retirement.

pealy

MrChips wrote:

The answer to this depends on your pension arrangements with your employer....

I knew there was a reason I used these boards - thanks for that detailed answer MrChips. I've tried to get in touch with my pension department but I think I'll need to battle my way through the offshore staff in India before I get to the inner sanctum where there are people who can actually help .