The Personal Finance Hub

💰 Should You Bonus… or Build a Pension Worth £1 Million?

With bonus payouts due to hit February or March payrolls, have you considered how to make the most of yours?

A house deposit?
A summer holiday?
Or… a pension investment?

For many, the last option doesn’t even make the shortlist. But if you’re in the £50k+ salary range, you could be losing 40% to 62% of your bonus to tax — unless you take a different approach.

⚖️ Option 1: Do Nothing

And to be clear — “Do nothing” is still a valid strategy, especially if:

• You need cash for an immediate goal (e.g., a house, clearing debt)
• You’re in a lower tax band where the impact is smaller

Just be aware: you could be handing over more than half your bonus to HMRC.

💼 Option 2: Use Salary Sacrifice and Keep 100%

If you don’t have an urgent cash need and were planning to save the bonus anyway — you might want to direct 100% of it into your pension via salary sacrifice.

📊 Worked Example

Assumptions:

• Base Salary: £105,000
• Pension Contributions: £5,000/year (5%)
• Annual Bonus: £20,000
• You are earning above £100k, so you fall into the 62% marginal tax trap.

🟥 Scenario 1: Take the Bonus in Cash

• Taxable Income: £120,000
• Monthly Pay (with bonus): £8,333 salary + £20,000 bonus
• After-tax take-home: £5,650 (salary) + £7,600 (bonus) = £13,250
• Tax on bonus: £12,400
• You keep just £7,600 of your £20,000 bonus.

✅ Scenario 2: Salary Sacrifice the Bonus into Your Pension

• Taxable Income: £120,000
• Monthly Pay: £8,333 (salary) + £0 (bonus)
• After-tax take-home: £5,650
• Pension contribution: £20,000
• Tax on bonus: £0
• You keep the full £20,000 — invested for your future.

📈 What Happens If You Leave That £20k Invested?

30-Year Horizon:

• 5% annual growth: ~£86,000
• 9% annual growth: ~£265,000

That’s a 13x return, or 35x more than just taking the bonus as cash.

💸 What If You Do This for 3 Years?

• Bonus invested = £20k × 3 = £60,000
• Time horizon = 35 years
• Result = £1,000,000+ (at long-run average returns)

Short-term gain: £22,800 (after-tax bonuses over 3 years)
Long-term gain: £1M+ pension pot

📌 Caveats and Considerations

• Your salary and bonus may vary, so always check your individual tax situation.
• The biggest marginal tax benefit occurs for those earning £100k–£130k.
• Investment growth is not guaranteed, but the tax logic is hard to argue with.

🧮 Next Steps

1. Check your pension headroom: Annual allowance is £60,000 (including employer contributions). If you and your employer contribute 5% each on £100k, that’s £10k — leaving £50k available.
2. Carry forward unused allowance: You can use unused allowance from the last 3 tax years.
3. Model your own numbers: Use thesalarycalculator.co.uk to see what you could save.

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