My annual salary is £200,000 and I have the usual option of taking my bonus this year or sacrificing it for a pension
contribution. I have previously chosen the pension route but with all the new rules I am unsure if bonus sacrifice is still an option for me and, if so, would it be worthwhile?
This has become a much more complex question than it used to be and each case must be looked at on an individual basis in conjunction with your wants and needs.
First, we need to assess your total income to see whether you are classed as a highincome individual under the new (interim) rules. As you almost certainly will be, then it is the amount of tax relief you receive on pension contributions made for and by you that is restricted.
You will be able to receive higher-rate tax relief on any amounts up to your special annual allowance. This allowance is worked out on an individual basis, dependent partly on pension contributions made over the last three years and up to a maximum of £30,000.
As the higher-rate tax relief would be 50 per cent this year, it is almost certainly worth making sure that you use this allowance if you can.
Any contributions made above this amount will not attract higher-rate tax relief but will still receive basic-rate tax relief, so long as they adhere to all the other pension contribution criteria.
In terms of bonus sacrifice, the main benefits are the tax relief and the National Insurance saving, which together make a substantial difference between what you receive in your hand using the bonus route and in your pension using the sacrifice route.
If the tax relief is restricted, then this difference is smaller and so the sacrifice looks less attractive. However, there may still be advantages.
Whether or not your employer adds the employer NI saving on to the pension contribution will also make a difference to the figures.
A bonus sacrifice of £100,000 with 12.8 per cent employer NI would result in a pension contribution of £112,800, versus an after-tax and NI income of £49,000. But the bonus sacrifice route would also result in a tax charge to you of up to £33,840, – depending on your remaining special annual allowance – that you might not be willing or able to pay.
There are ways of splitting the amount between pension and bonus in order to provide the funds to pay the tax charge, which would obviously reduce the pension contribution amount considerably.
It is also important to consider the situation at the other end, that is, when you take the benefits of your pension.
If you are likely to be a higher-rate taxpayer at that point, you could end up paying more tax on your pension income than you received in tax relief by making the contributions, so you should question the merits of making the contribution.
However, if you are likely to be a basic-rate taxpayer at that point and you have a reasonable timeframe during which to enjoy the tax-efficient growth within a pension, you may feel it is worthwhile.
As with all things financial, you need to consider your personal circumstances – whether or not increasing your pension is your priority or whether other forms of saving combined with your existing pension provision may be more useful to you in the longer term – and these will often help give the answers.
Emma Duncan is a director at Thameside