Putting your bonus into your pension tax free is possible in the UK, but only through an arrangement called bonus sacrifice, agreed with your employer before the bonus is due to be paid. Under that arrangement, you give up your right to the cash bonus and your employer pays the equivalent amount straight into your workplace pension. Because the money never counts as your earnings, no income tax and no National Insurance come off it. The full gross figure lands in your pension pot instead of the reduced amount you would take home as cash.
How Bonus Sacrifice Works
Bonus sacrifice is a form of salary sacrifice applied to a one-off payment. You and your employer formally vary your contract so that a future bonus is replaced by an employer pension contribution of the same value. The timing rule is strict: the agreement has to be in place before the bonus is contractually owed to you. Once you have earned it and it is due, it is too late. HMRC will treat it as normal taxable pay wherever it ends up.1GOV.UK. Salary Sacrifice for Employers
Because the money moves directly from employer to pension provider, the payment is classified as an employer contribution rather than your earnings. That reclassification is what removes the tax and NI. Your employer needs to document the change with updated contract terms and payslips reflecting the adjustment, since HMRC expects to see that evidence if the arrangement is ever reviewed.2Aviva. Salary Sacrifice and Pensions
No employer is required to offer bonus sacrifice. If yours doesn’t run a scheme, you would need to ask HR or the benefits team whether one can be set up. Many are willing because they save money on the arrangement too.
What You Actually Save
Two taxes fall away. Income tax at your marginal rate: 20% at the basic rate, 40% at the higher rate, 45% at the additional rate. And employee National Insurance: 8% on earnings between £12,571 and £50,270, and 2% above that.3GOV.UK. HMRC Employment Income Manual – EIM42785 – Salary Sacrifice Contributions to a Registered Pension Scheme
Your employer also avoids the 15% employer National Insurance on the sacrificed amount. Some employers hand part or all of that saving on to you as an extra pension contribution. Others keep it. It’s worth asking which applies at your company.4GOV.UK. National Insurance Rates and Categories
A Basic-Rate Example
Say you earn £40,000 and get a £4,000 bonus. Taken as cash, £800 goes to income tax and £320 to employee NI, leaving you with £2,880. Sacrificed into your pension, the whole £4,000 goes in. That’s £1,120 that would otherwise have gone to HMRC now working for your retirement.
A Higher-Rate Example
On a £60,000 salary with the same £4,000 bonus, cash would cost you £1,600 in income tax plus £80 in employee NI (2% because you’re already over £50,270), netting £2,320. Sacrificed, all £4,000 reaches your pension. And if your employer passes on their £600 NI saving, the total contribution can reach £4,600.
How Much You Can Sacrifice
You cannot shelter unlimited amounts. The annual allowance caps total pension contributions receiving tax relief in a tax year (6 April to 5 April) at £60,000 for most people. That total includes your personal contributions, standard employer contributions, and anything routed in through bonus sacrifice. Anything above the allowance triggers an annual allowance tax charge that removes the tax advantage on the excess.5GOV.UK. Tax on Your Private Pension Contributions – Annual Allowance
If you do go over, you can pay the charge through self-assessment or ask the pension provider to pay it from the pot under a mechanism called scheme pays.6MoneyHelper. Annual Allowance for Pensions
Using Unused Allowance From Previous Years
If a bonus would push you past £60,000 this year, carry forward may let you use unused allowance from the previous three tax years. You have to have been a member of a registered UK pension scheme in each of the years you are drawing from, and the earliest year’s unused allowance is used first.7GOV.UK. Check if You Have Unused Annual Allowances on Your Pension Savings
The Taper for High Earners
If your threshold income is over £200,000 and your adjusted income is over £260,000, your annual allowance is reduced by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. Both income tests must be met for the taper to bite. At £300,000 of adjusted income the allowance falls to £40,000. Large bonus sacrifices in this bracket need careful arithmetic to avoid an unexpected charge.5GOV.UK. Tax on Your Private Pension Contributions – Annual Allowance
If You Have Already Drawn From a Pension
If you have already accessed a defined contribution pension flexibly, through drawdown or an uncrystallised funds pension lump sum, your allowance for further money purchase contributions falls to £10,000. Carry forward doesn’t rescue this: unused money purchase annual allowance cannot be carried forward. It’s a trap for people who have taken money out early and then try to sacrifice a bonus back in.
What Sacrificing Your Bonus Can Affect
Bonus sacrifice lowers your official earnings on paper. That ripples further than most people expect, so check each of these before signing anything.
- Statutory maternity, paternity, and sick pay are based on qualifying earnings. A lower earnings figure can shrink the payment. Under a salary sacrifice arrangement, your employer must keep paying the full employer pension contribution throughout maternity leave, but the statutory pay itself may still be smaller.8MoneyHelper. Maternity and Paternity Leave and Your Pension
- State Pension qualifying years depend on National Insurance. If sacrifice pushes your pay below the lower earnings limit, you may not build a qualifying year. Unlikely for a full-time worker giving up one bonus, but worth checking on part-time or lower salaries.
- Mortgage lenders assess affordability on gross salary. A lower contractual salary can reduce the offer, so the timing of any sacrifice relative to a mortgage application matters.
- Death-in-service and income protection benefits are often calculated as a multiple of salary. Some employers use pre-sacrifice salary for the calculation and some don’t; check the scheme’s terms.
There is also a legal floor. Your pay after sacrifice cannot fall below the National Minimum Wage. If the arrangement would take your effective hourly rate below that, it breaches employment law, though guidance from the Department for Business and Trade offers some protection from penalties where the employee genuinely consented and got the pension benefit in full.9BDO. National Minimum Wage and Salary Sacrifice – What You Need to Know A one-off bonus sacrifice by someone well above minimum wage rarely runs into this, but stacking multiple salary sacrifice benefits can bring the cumulative reduction close.
Setting Up a Bonus Sacrifice
The mechanics are simple. The timing is not.
- Ask HR or the benefits team whether bonus sacrifice is offered, and whether elections run to a fixed window or on request.
- Decide how much to sacrifice. You can give up all or part of the bonus. Before you pick a figure, work out how much annual allowance you have left after other pension contributions already made this tax year.
- Submit the election early. It has to be complete before the bonus is contractually owed. Employers usually close the window several weeks before the payment run, and a missed deadline turns the bonus back into taxable pay.
- Give the pension details your employer needs to route the payment: provider name, policy number, and which scheme should receive the funds if you have more than one.
Once the sacrifice has been processed, check the payslip to confirm the bonus is not in your taxable pay, and check your next pension statement for the employer contribution. If figures don’t match, raise it with the benefits administrator quickly. Errors are easier to correct inside the tax year than after it closes.
Tax When You Take the Money Out
Bonus sacrifice avoids tax on the way in, not tax forever. Pension income is taxed at your marginal rate when you draw it in retirement, though for most people that rate is lower than during their working years. You can also take up to 25% of the pot as a tax-free lump sum when you start drawing it, subject to a lump sum allowance of £268,275. The remaining 75% is taxed as income as it is withdrawn. A bonus sacrificed today can grow over decades of investment inside the pension, and a quarter of that grown amount will come out untaxed. Tax-free entry, tax-free growth, and a partially tax-free exit are what make this route one of the most efficient ways to hold on to a bonus.