Jessica O'ConnorWorkers could lose more than 40% of their Christmas bonuses to Income Tax and National Insurance (NI) unless they redirect the money into their pension, according to pensions provider Penfold.
With year-end bonuses being paid alongside rising seasonal spending, Penfold warned that bonuses are taxed in the same way as salary, meaning a significant portion can be lost before it reaches employees’ bank accounts.
In some cases, further deductions such as student loan repayments can reduce take-home pay even more.
Penfold pointed to an example of an employee earning £75,000 who receives a £10,000 bonus but takes home just £5,675 after tax and National Insurance.
The firm sais “bonus sacrifice”, where a bonus is paid directly into a pension before tax and NI are applied, offers a way for workers to retain the full value of their reward.
Chris Eastwood, CEO and co-founder of Penfold, said: “December is a time of giving, but it’s also when financial pressures peak. A Christmas bonus can be a welcome boost, but also often easy to lose to tax and short-term spending. However, in redirecting a bonus into your pension, you can make the reward go much further.”
He added that understanding how bonuses are treated for tax purposes is increasingly important for employees.
He said: “It is more important than ever for workers to understand how to protect the value of year-end rewards.
“As bonuses are taxed as regular income, many employees end up disappointed by what actually lands in their accounts after deductions. 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.
“Through bonus sacrifice, UK workers can redirect some or all of their bonus into a defined contribution pension pot – before tax and NI are taken.
“This can save thousands in tax, grow long-term savings, and in many cases increase employer contributions where NI savings are shared. Employers also benefit by avoiding paying NI on the bonus, with many often passing these savings back into employees’ pensions as extra contributions.”
Eastwood said the arrangement is straightforward but requires early engagement with employers and payroll teams.
He added: “Bonus sacrifice is quick and easy to set up, but it just requires preparation in starting those payroll conversations before the bonus is processed.
“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 concluded: “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.”
