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Is my bonus pensionable?

Lee Mannion | Wednesday 20th July, 2022

Every employee loves receiving a bonus. In fact, it's one of the most sought-after employee benefits in the UK.

The only downside is all that extra tax. Luckily, there's a way to stay tax-efficient available to almost all UK workers - your pension.

Are bonuses pensionable and could you slash your tax bill by adding your bonus into your pension?

In today’s blog, we explain the pros and cons of putting your bonus into your pension and how this can affect your pensionable earnings.

Tax on bonuses: How it works

If you've ever been lucky enough to receive a bonus from your job, you may have been disappointed with the final amount that actually lands in your pocket. So, how does bonus tax in the UK actually work?

For all intents and purposes, any bonus you receive is treated as income when it comes to tax.

That means your bonus is subject to the same tax as your salary. You'll pay:

  • income tax (at your marginal rate)
  • national insurance
  • personal deductions (like a student loan)

Your bonus may also impact your pension contribution for the month, but that's only if your employer uses your total earnings when calculating contributions. Chat to your HR team or pension provider if you aren't sure.

It all means that the amount of your bonus you actually receive may be a lot less than you expected. For example, someone earning £75,000 who earns a £10,000 bonus would only end up receiving £5,675!

And that's without any further reductions for things like a student loan. Check out this handy bonus calculator to see your breakdown.

Luckliy, if you'd like to keep a larger share of your bonus, you do have a way around it. Your pension.

bonuses are taxed the same way as regular income


Can you put your bonus into your pension? 

If you have a defined contribution pension, you'll have the option of 'sacrificing' your bonus into your pension.

Rather than coming straight to your bank account, your bonus will be added into your pension, ready for your retirement.

The only exception is if you are enrolled in a defined benefit (or final salary) pension. If you're part of one of these schemes, you won't be able to pay your bonus into your pension.

This is because the majority of defined benefit pensions pay either a percentage of your final salary or an average of your salary as the final amount.

The good news is adding your bonus to your pension is easy - you'll just need to let your employer know ahead of time.

But before you do, there are a few things you'll want to check. Here are the pros and cons of a bonus pension sacrifice.



The biggest benefit of paying your bonus into your pension are the tax savings. If you receive your bonus as cash, then you’ll need to pay the corresponding national insurance and income tax at the marginal rate as we outlined above.

However, when you elect to add your bonus to your pension, it's completely tax-free. You get to keep the full amount.


To illustrate, Amira earns £35,000 a year and is expecting to receive a £5,000 bonus. By taking it as cash, she ends up losing 33.25% of her bonus - that's £1,162.50!

When paying the bonus into a pension, Amira keeps everything.

table showing how a bonus is taxed at the basic rate

It's even worse for higher earners. Ritesh earns £60,000 a year and received the same £5,000 bonus as above.

He loses 43.25% of his bonus, or £2,162.50.

table showing how a bonus is taxed at the higher rate

The higher your earnings, the more you will save in taxes when you pay your bonus into your pension, even as NI contributions drop to 3.25% for higher-rate taxpayers.

Plus, your employer will not be liable to pay NI contributions on your bonus and in many cases, they will pass these savings onto you. That’s more money for your pension pot!

You can also choose to put a portion of your bonus into your pension for the tax savings, while taking some as cash. This is a great option for those who like to treat themselves a little when the bonus comes in.



While it can seem like a no-brainer to tuck your bonus away inside your pension, there are restrictions in place which can impact high earners.  

There is an annual allowance of £40,000 a year that can be paid into a pension, or up to 100% of earnings. This includes employer and employee contributions.

For those with a large annual bonus, you'll need to make sure you're under these limits of you could face a tax charge.

However, if you've been part of a pension scheme for a few years, it's also worth noting you can temporarily boost your annual allowance by carrying forward your pension allowance from previous years.

How to sacrifice your bonus

Once you receive confirmation of your bonus, you’ll need to speak to your employer and let them know how much of your bonus you wish to pay into your pension.

Assuming your pension plan accepts payments from your employer, your pension provider will then take care of the rest.

you can also take some of your bonus as cash and sacrifice the rest into your pension


How your bonus might affect your pensionable earnings 

Depending on the method your employer uses to calculate pensionable earnings, your bonus may form part of your contributions to a workplace pension scheme.

If you're scheme uses ‘qualifying earnings’ or ‘total earnings’, then your bonus will form part of your contributions, increasing your pensionable earnings.

This means your one-off contribution for the month you receive your bonus will be higher.



In summary, the answer to ‘are bonus payments pensionable’ is yes!

You can save a significant amount of tax if you choose to sacrifice your bonus, particularly if you're a higher earner.

You can also choose to only sacrifice a portion of your bonus. All you need to do is speak to your HR team.

Have you lost track of pensions from previous jobs. Discover how easy it is to bring all your old pots together in one app with Penfold.

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