Reducing tax on a bonus

Black_Monk

Dear All

My wife will be receiving her bonus this month, she normally invests it in her pension but she has reached her lifetime allowance.  If she just has her bonus paid into her bank account she will pay tax on it at 40%.  Is there any way she can take her bonus without paying so much tax?  Any replies will be greatly appreciated.

Kind regards

Black Monk

Dazed_and_C0nfused

She can increase her basic rate tax band by making charitable payments under the Gift Aid scheme.

As well as the tax benefit the charity gets a qualifying contribution means more income is taxed at 20% and less at 40%.

And she could at investing in Venture Capital Trusts.  This doesn't prevent the 40% tax being payable but gives a tax reduction off her overall tax liability.  They're probably not for the novice investor though.

Albermarle

If she did put it into her pension , assuming it is a DC pension and assuming she will be a 20% taxpayer in retirement, she will not lose or gain . She will save 40% income tax, and lose 40% LTA tax assuming she takes the pension as income and not as a lump sum.
However there a couple of possible advantages to doing that .
1) The pension may drop in value in a market crash and LTA may become less of an issue
2) Any money in a DC pension pot is not subject to inheritance tax under current rules.

Jeremy535897

I would question whether your first point is an advantage, as it is only so if the sole alternative was making the same investments outside the pension.

EdSwippet

Albermarle said:

If she did put it into her pension , assuming it is a DC pension and assuming she will be a 20% taxpayer in retirement, she will not lose or gain . She will save 40% income tax, and lose 40% LTA tax assuming she takes the pension as income and not as a lump sum.

Questionable assumptions. Also, given that the tax outcome is likely to be neutral at best, there seems little to be gained from accepting the additional restrictions of a pension (no access until age 55/57, political football that is subject to whim of governments, etc).

Personally, I wouldn't put money into a pension above the LTA unless there was a compelling employer match that couldn't be taken any other way. Rather, I'd view this 'problem' as a motivation for cutting down on working hours, or even early retirement.

Albermarle

I was not advising to do anything, just pointing out some possibilities the OP may not have considered, especially the IHT issue.

MattMattMattUK

Black_Monk said:

Dear All

My wife will be receiving her bonus this month, she normally invests it in her pension but she has reached her lifetime allowance.  If she just has her bonus paid into her bank account she will pay tax on it at 40%.  Is there any way she can take her bonus without paying so much tax?  Any replies will be greatly appreciated.

Kind regards

Black Monk

I think your wife really only has the option of taking it on the chin, just like the rest of us higher or additional rate taxpayers.