Christmas bonuses can be a delightful surprise, but for many UK workers, the joy is short-lived.
Bonus sacrifice must be arranged before the payment is processed through payroll (Image: Getty)
Many UK employees risk seeing a significant chunk of their Christmas bonus vanish due to tax and National Insurance unless they take action in advance. Year-end bonuses, often a welcome financial boost, are taxed just like regular income. For higher earners, this can mean losing over 40% before the money even reaches their bank account.
A person who earns £75,000, for example, and who receives a £10,000 bonus might only take home around £5,675 after deductions. The amount could be lower if additional payments, such as student loans, are being deducted.
He urged employees to consider a strategy known as bonus sacrifice to protect their reward (Image: Getty)
Pensions provider, Penfold, has warned that workers could lose 40% of their Christmas bonuses to Income Tax and National Insurance unless they redirect it into their pensions.
Chris Eastwood, CEO and co-founder of Penfold, said that many workers feel disappointed when they realise how little of their bonus finds its way in their account.
He 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.”
Eastwood recommended considering a method called bonus sacrifice to reduce the impact.
He explained: “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.”
Employers can also benefit from the arrangement, as contributions to a pension are exempt from employer National Insurance. Many companies pass these savings on by adding extra contributions to employees’ pension pots.
Timing is crucial. Bonus sacrifice must be arranged before the payment is processed through payroll. Employees should contact their HR or payroll department in advance to request the change.
Workers can choose to sacrifice the full bonus or just a portion, but early communication ensures the arrangement is applied correctly.
Eastwood said: “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.”
