UK employees expecting a festive windfall are being warned they could see more than 40 percent of their Christmas bonus disappear due to income tax and National Insurance deductions. Pension specialists highlight that many workers remain unaware that bonuses are taxed identically to regular salary, leading to a significant reduction before the money hits their bank account.
The Heavy Tax Hit on Your Bonus
For higher-rate taxpayers, the combined impact of income tax and National Insurance can strip away over 40% of a bonus payment. The digital workplace pension provider, Penfold, illustrates this with a stark example: an individual earning £75,000 who receives a £10,000 bonus might only take home around £5,675 after these deductions. This figure could be even lower once additional items like student loan repayments are applied.
Chris Eastwood, CEO and co-founder of Penfold, observed that the reality of a heavily taxed bonus often leaves employees feeling short-changed. "December is a time of giving, but it's also when financial pressures peak," he said. "A Christmas bonus can be a welcome boost, but also often easy to lose to tax and short-term spending."
How Bonus Sacrifice Can Protect Your Money
The key strategy to avoid this substantial tax bite is known as "bonus sacrifice." This arrangement allows workers to forgo receiving some or all of their cash bonus directly. Instead, the full amount is paid straight into their defined contribution pension pot before tax and National Insurance are calculated and deducted.
"Bonus sacrifice ensures the full value goes through to your pension instead, avoiding these deductions entirely and keeping more of the reward working for your future," Eastwood explained. This move not only preserves the bonus from immediate taxation but can also trigger extra contributions from employers. As firms do not pay National Insurance on pension contributions, many choose to share some or all of that saving by adding it to the employee's pension.
Act Now: Timing is Crucial
However, setting up this arrangement requires forward planning. Workers typically need to arrange bonus sacrifice in advance by speaking to their payroll or HR department before the bonus is processed.
"Bonus sacrifice is quick and easy to set up, but it just requires preparation in starting those payroll conversations before the bonus is processed," Eastwood advised. "The end difference is stark and simple: instead of losing a chunk of your bonus to tax, 100% of the sacrificed amount goes into your pension."
He urged workers to consider the long-term benefit: "While you're busy giving to others this holiday season, consider giving yourself the ultimate gift: a stronger financial future. Redirecting a short-term windfall into long-term gain is one of the smartest moves in planning for the future, without sacrificing festive cheer."
