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.

dunstonh

if its paid to you, it will have 40% deducted. If you then pay it into a pension, it will get 22% added back on straight away with the other 18% being taken into account on your tax return.

If you can get your employer to pay it directly into your pension, you would save on NI making this a slightly better option.

bluep

It's definately worth doing - you will get the 40% tax back even if its delayed until you do your tax return. You can put a total of 15% of your gross income into your pension each year and get tax relief on it although this 15% includes your normal % contribution, any % that your firm contributes as matching and any additional voluntary contributions (AVIs) that you choose to make (i.e. this bonus payment).

It's worth mentioning too that if your bonus is sufficiently high (wishful thinking) that it would put you over this 15% relief allowance, you can elect via letter to the Inland Revenue to record some of it as being paid into your pension last year, assuming you didn't use up all of your pension tax allowance in the previous tax year, you then can claim the tax relief rebate in your return this year. Sounds odd but its true!

Like dunstonh says, you will get hit for the NI on it unless it gets paid from your gross salary by your employer into the pension scheme and unfortunately, unlike tax, you cannot claim NI back at a later stage if you overpay. Good news is though, you'd only pay 1% NI on anything over £610 in the week you are paid the bonus so if you are a higher level tax payer anyway, the likelyhood is that this NI won't hit you too hard.

Worth talking to your employer asap about what their payroll dept can do re. the AVI.

hope that helps.

ditto the disclaimer above btw - not professional advice and if you need professional advice, go find a professional!

MrChips

bluep wrote:

although this 15% includes your normal % contribution, any % that your firm contributes as matching and any additional voluntary contributions (AVIs) that you choose to make (i.e. this bonus payment).

Are you sure that matching contributions count as part of the 15%? Surely it is just "employee contributions" that are taken into account? There is no restriction on "employer contributions" as far as the member is concerned? Or have I been unaware of this quirk for the last four years?!!

isasmurf

I think perhaps bluep is mixing up the different types of pension. With an occupational pension employees may contribute up to 15% of their earnings into an OP and AVC. In a Personal Pension the contribution limits include the total of the Individual's contributions and the employers contributions. But in an Occupational Pension as Employers have to make a 10% contribution to an Occupational Pension to receive approval from the IR, that would only leave employees being able to contribute 5%.