Bonus sacrifice: Save on NI and stand out as an employer

The good news? There's a better way to do it: bonus sacrifice. 

This is sometimes called 'bonus redirect', because your employees aren't actually giving anything up. They're choosing to invest their bonuses in order to have more money in their hands at a later date. 

As for you, the employer, the benefit is in offering an attractive perk that boosts morale and retention, without increasing your employer's NI bill.  

Understanding bonus sacrifice 

What is bonus sacrifice? 

Bonus sacrifice means paying part or all of a one-off, performance-linked, monetary reward into an employees’ pension instead of including it in their paycheque: 

• The employee decides how much of the bonus to set aside 

• You, the employer, pay that amount directly into their pension 

The amount gets invested with the rest of their pension.

The tax implications of bonus sacrifice  

The biggest benefit of bonus sacrifice is the tax treatment.  

If you were to pay the bonus as part of their salary, it would be subject to income tax and NI deductions.  

With bonus sacrifice, the payment is treated as an employer pension contribution, not as part of the employee's salary. So, no income tax or NI is due on the amount. 

Here are three worked examples showing how bonuses impact low, middle, and higher earners, and how the picture changes when the bonuses are redirected through a bonus sacrifice scheme. 

A: An employee on £23,000 a year who receives a £3,000 bonus 

If this employee received their bonus with their paycheque, they’d pay £3,760 in tax and NI.  

By contrast, redirecting the bonus to their pension would mean they’d retain the full £3,000. And their tax and NI bill would be £2,920 – £840 lower. You, the employer, would also save £450 in Employer’s NI.  

B: A middle earner on £50,000 who receives a £5,000 bonus 

In this example, the bonus would bring the employee’s total annual income to £55,000, which would nudge them into the 40% income tax bracket. As a result, their total tax and NI bill would be £12,543.  

Redirecting the bonus would keep them into the 20% tax bracket, so their tax and NI bill would be £10,480. They’d also keep the full £5,000 of the bonus. 

From an employer’s perspective, the bonus sacrifice would also save £750 in Employer’s NI.  

C: A high earner on £120,000 a year who receives a £10,000 bonus 

Here, the bonus would drive the employee’s tax and NI bill up to £49,314.  

Redirecting the bonus to their pension would keep their tax and NI liability at £43,843 – £5,471 less. The employer would save £1,500 in Employer’s NI.

Why offer a bonus sacrifice scheme: The benefits for employers 

The benefits of bonus sacrifice schemes for employers go beyond tax and NI savings.  

Done well, bonus redirect makes your benefits package more competitive, because you're giving employees the option of a smarter, more tax-efficient way to receive performance bonuses. A bonus sacrifice scheme is also a practical way of helping employees who are on the cusp of a higher tax bracket avoid getting penalised because your organisation did well out of their hard work. And, it improves loyalty and retention by boosting your employees' retirement pots and enhancing their long-term financial wellbeing. 

There are three key elements to an effective bonus sacrifice scheme:  

• Process 

• Timing 

• Communication

Process
Who is eligible for the scheme, which bonuses qualify, and how will the scheme work?  

As a rule, bonus sacrifice applies to performance-linked, one-off cash bonuses that employees get through payroll. It doesn't apply to vouchers, gifts or other ongoing allowances.  

Who is eligible, on the other hand, is up to you. You can apply it to all employees, only to those above a certain grade, or depending on criteria such as a minimum number of years of service.  

It's good practice to give employees a say on how much they redirect.  

Redirecting a percentage – 25% of any bonus amount, for instance – is the most straightforward way to go, especially if employees won't know the exact bonus amount in advance.  

Alternatively, you could give them the option of setting aside a fixed amount, with clear rules in place for when bonuses are lower than anticipated.  

Once HR, payroll, and line managers are aligned, make sure the redirected amount is clearly marked as an employer pension contribution and that the payslip shows the: 

• Full bonus amount 

• Sacrificed amount 

• Reduced taxable pay 

Timing
This is one of the most common pitfalls we see in bonus sacrifice schemes.  

If your bonus sacrifice window – the time within which employees can decide whether to redirect – is too narrow, uptake will likely be low. But if the window is too wide, many employees may change their mind, either because they get cold feet or because something comes up and they reckon they could use more cash in hand. 

At Cushon, we've found that the 'Goldilocks' zone is four weeks. This is long enough for people to think it over and ask questions, but short enough that they're less likely to change their minds or forget about it.  

Just as important, opting in should be quick and easy. Use a short online form to capture the employee's name, amount redirected, and a declaration that they understand the implications – that is, that they won't be able to withdraw the redirected amount until their 55th birthday (or, from April 2028, their 57th birthday).  

Communication
It goes without saying, but employees can't opt into your bonus sacrifice scheme unless they know about it.  

For best results, it's worth telling eligible employees not just when bonuses are due and that they can redirect some or all of them, but also about the benefits. And it’s vital to do this in simple, jargon-free language.  

The key is to empower employees to make an informed decision. This is more likely if they understand the benefits – tax savings and long-term growth – and the drawbacks (that is, that they won't be able to access their money until they're 55, or, from April 2028, until they’re 57).  

Bonus sacrifice schemes are a win-win 

They're an effective way for your employees to boost their pension pots, and they have compelling tax benefits for both them and your firm. All while positioning you as a savvy, supportive employer who walks the talk on financial wellbeing.  

And isn't showing you care for your employees in practical ways one of the best investments you can make in your organisation's continued success? 

Article by

NatWest Cushon