Bonus pension sacrifice: paying your bonus into your pension

Salary sacrifice (also called salary exchange) is a government approved arrangement where you and your employer agree to make a change to your employment contract, this may help you and your employer save on tax. You’re giving up part of your salary in exchange for non-cash benefits like childcare vouchers and bicycles through cycle to work schemes, or even employer pension contributions.

If your employer offers a bonus scheme, there’s nothing more exciting than imagining what you’re going to do with that extra cash. Clear some debt, go on holiday, treat yourself to that thing you’d had your eye on for ages. But did you know you can use your bonus to potentially make you more money with bonus pension sacrifice?

The headline grabbing benefits such as childcare vouchers and cycle to work are now well established, but bonus pension sacrifice is another really popular salary sacrifice benefit too. 

The majority of us if we receive a bonus have it paid into our bank account after UK Income Tax and National Insurance contributions have been deducted. Bonus pension sacrifice is when you ask your employer to pay all or some of your bonus into your pension plan. One of the biggest reasons for paying your bonus into your pension is because you save on tax and increase your pension pot at the same time. But there other things to consider so let’s explore further and you can weigh up whether it's right for you.

It's important to remember that the value of a pension can fall as well as rise, and you could get back less than has been put in.

Your exact tax benefits will depend on your circumstances and may change in the future. 

 It’s a question that should be fully thought out, with the pros and cons carefully considered before you make any decisions. While lots of people do pay into their pension and there are lots of benefits, you should consider what you need the lump sum from your bonus for. There are certain cons to putting your bonus straight into your pension – you won’t be able to access the money until you reach 55. Ultimately, it’s important to consider whether you need to use the lump-sum payment in the short term, or whether you can afford to put this away into your pension.

If you do decide to pay your bonus into your pension, there are lots of benefits from doing so.  Firstly, if you sacrifice your bonus, you’ll receive the full value without losing any of it to UK Income Tax. Plus, you’ll pay less National Insurance too. This means you receive the full value of your bonus(es) paid into your pension which can boost the size of your pension pot when you retire. To salary sacrifice your bonus, you’ll need to have a sacrifice agreement already in place. This should be done before you receive a bonus and before the bonus amount is known.

Let’s say you’re earning £38,000 per year and are about receive a £3,000 bonus. If you want your bonus now and have it paid into your bank account, you’ll pay 20% tax and 8% National Insurance – based on 2025/2026  tax year rates – which looks like this:

£3,000 bonus

-£600 UK Income Tax

-£240 National Insurance

= £2,160 in your pocket.

Whereas if you use pension bonus sacrifice and have it all paid into your pension you’ll get the full £3,000 invested into your pension plan. 

Your employer might also be willing to pass on some of the employer National Insurance payments that may have been taken from your bonus, which would mean more than £3,000 being added to your pension. And if you’re a higher rate tax payer, then your tax savings could be even more. Over time with future bonus payments into your pension, it could really add up. 

Whether you should pay your bonus into your pension is a really personal decision. If you're looking forward to your bonus and have it earmarked for something special then why not have the bonus paid to you and enjoy the fruits of your hard work?

On the other hand, you may be thinking about the future and wanting to build your pension pot, in which case, bonus pension sacrifice is a great way of increasing your pension contributions in a tax-efficient way.

What are the pros and cons of paying your bonus into your pension?

While the benefits of bonus pension sacrifice appear really clear, there are a few things we think you should consider as your earnings and personal circumstances will probably have a bearing on whether you’ll want to do it.

If you’ve weighed up the pros and cons of bonus pensions sacrifice and have decided it’s right for you, it’s usually quite straightforward. If you pay the higher or additional rate of tax, you should be able to claim any extra tax relief on the contribution through your self-assessment tax return. If you don't normally complete a tax return, you can make a claim through HMRC.

Firstly you’ll need to check that your employer is allowed to make payments into your plan. If they are then all you need to do is ask your employer in advance to pay all or some of your bonus into your pension.

If your pension plan won't allow payments from your employer, you can still pay it into your plan after it's gone into your bank account. Similarly, if you've already received your bonus and you decide later that you wish to pay it into your pension plan, it's not too late. Paying your bonus into your pension plan at this point does mean though you immediately won't get the Income Tax, but you will still benefit from pensions tax relief. This is the government funded 'top up' on the pension contributions you make, meaning an extra amount is added to each payment into your plan.

Before we get into the reasons for and against, it’s worth noting that if your pension contributions are a proportion of your salary each month (instead of a lump sum) then if your pay increases, your monthly pension contributions will as well. So you’ll automatically be paying more into your pension as a result of your pay rise. If on the other hand you pay a fixed amount into your pension each month, then you'll need to decide whether or not to increase that fixed amount. 

Putting your pay rise into your pension is another option – you’ll receive the tax and National Insurance benefits and you’re less likely to miss money you didn’t have before. But as is often the case, your personal circumstances have a huge bearing on if and when is the right time to increase your pension contributions. If you’re in the early years of paying a mortgage or raising a family you’re likely to have competing demands for any extra income and it might not be the right time. 

But if you’re reaching a point where you can top up your pension – if you don’t need the extra income for living costs or are nearing retirement – then paying your pay rise into your plan could be beneficial in the long run. A relatively modest increase in monthly contributions can have a dramatic impact on your pension pot when you retire. You can see for yourself using our simple pension calculator to model contributions and outcomes here. 

For the majority of us, the most we or anyone else can pay into our pension each year before having to pay tax on contributions is £60,000. It’s called the pension annual allowance and it starts again every year on 6 April and runs until 5 April in the following year. So if we’re approaching the tax year end and you haven’t used your full tax-free allowance, then topping up your pension from your bonus could be a good idea. 

On the other hand if you’ve nearly used your annual allowance and are worried that paying your bonus into your pension will take you over the limit, you maybe able to carry over any unused allowances from the last three tax years.