Bonus sacrifice: the tax case for channelling bonuses into pensions.
A bonus taken as cash is taxed as income and subject to National Insurance. Sacrificing it into a pension avoids both. The saving is larger than most people expect.
- ▸Bonus sacrifice works like salary sacrifice: the employer pays the bonus directly into the pension instead of as cash. The employee avoids income tax and NI; the employer avoids employer NI.
- ▸On a £20,000 bonus for a 40% taxpayer, the combined saving (income tax + employee NI + passed-on employer NI) can exceed £9,000.
- ▸The annual allowance (£60,000 for 2025/26) caps total pension contributions including sacrificed bonuses. Exceeding it triggers a tax charge.
- ▸Not all employer schemes allow bonus sacrifice. It must be agreed before the bonus is earned, not after.
The NI saving: why it's more than just income tax
Most people think of bonus sacrifice as saving income tax — 40% or 45% depending on the rate band. That is correct, but it understates the total benefit because it ignores National Insurance.
When a bonus is taken as cash, the employee pays:
- Income tax at their marginal rate (40% or 45%)
- Employee NI at 2% (on earnings above £50,270)
When the same bonus is sacrificed into a pension:
- No income tax (the payment is an employer pension contribution, not employee earnings)
- No employee NI
- No employer NI (the employer saves 13.8%)
The employee NI saving is 2% — modest on its own. But the employer NI saving of 13.8% is substantial, and many schemes pass some or all of it to the employee as an additional pension contribution. This is where the arithmetic becomes compelling.
Employer NI: often passed on to the employee
When an employer pays a bonus as cash, it costs the employer the bonus amount plus 13.8% employer NI. A £20,000 cash bonus costs the employer £22,760.
If that bonus is sacrificed into a pension, the employer's cost is just the pension contribution — no employer NI. The £2,760 saving belongs to the employer, but many organisations pass it on to the employee (in full or in part) as an additional pension contribution. This is a genuine efficiency gain — the same gross cost to the employer produces a larger pension contribution.
Whether your employer passes on the NI saving depends on company policy. Some add 100% as extra pension, some add a portion, and some keep it. The scheme documentation or HR team will confirm the position.
Worked example: £20,000 bonus
Take a higher-rate taxpayer earning £90,000 base salary, receiving a £20,000 bonus.
Option A — Take the bonus as cash:
- Income tax: £20,000 x 40% = £8,000
- Employee NI: £20,000 x 2% = £400
- Take-home from bonus: £11,600
Option B — Sacrifice the bonus into the pension:
- Income tax: £0
- Employee NI: £0
- Pension contribution: £20,000
- If employer passes on NI saving: +£2,760
- Total in pension: £22,760
The difference between £11,600 in cash and £22,760 in pension is £11,160. Even without the employer NI pass-through, the pension receives £20,000 versus £11,600 — a £8,400 advantage.
The trade-off: the money is locked until pension access age (currently 55, rising to 57 in 2028). There is no early access. For anyone who needs the cash now, sacrifice is not an option.
The salary sacrifice calculator models the full NI and tax interaction. The annual allowance checker confirms whether the total contribution (salary sacrifice plus bonus sacrifice plus employer contributions) fits within the allowance.
Conditions for the scheme to allow it
Bonus sacrifice is not automatic. Several conditions must be met:
1. The employer scheme must offer it. Not all workplace pension schemes include bonus sacrifice as an option. Some only offer regular salary sacrifice.
2. The agreement must be made before the bonus is earned. HMRC requires the sacrifice arrangement to be in place before the relevant pay period. Agreeing to sacrifice a bonus after it has been calculated and communicated risks HMRC treating it as a retrospective arrangement — which would mean the bonus is still taxed as earnings.
3. National Minimum Wage floor. After sacrifice, the employee's remaining cash pay must not fall below the National Minimum Wage. For high earners this is rarely an issue, but it applies in principle.
4. The annual allowance applies. The sacrificed bonus counts as an employer pension contribution and uses annual allowance. A £20,000 bonus sacrifice on top of £45,000 of regular pension contributions would exceed the £60,000 annual allowance by £5,000, triggering a tax charge on the excess.
Timing matters. If bonuses are paid in April, the sacrifice election typically needs to be signed by the end of March. HR departments usually have their own deadlines.
- ▸Salary sacrifice (including bonus sacrifice) must be agreed before the earnings are treated as received. Retrospective arrangements do not qualify for NI and tax exemption. [HMRC]
- ▸Employer NI is 13.8% on earnings above the secondary threshold (£5,000 for 2025/26). When a bonus is sacrificed, the employer avoids this charge. [HMRC]
- ▸The annual allowance for pension contributions is £60,000 for 2025/26. All employer and employee contributions, including sacrificed bonuses, count toward this limit. [HMRC]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.