4 December 2020
With Christmas and the end of the financial year fast approaching, many employers will look to recognise their employees’ hard work and achievements by paying end of year bonuses.
How to provide the most cost-efficient reward to employees?
Usually, there is no silver bullet, however in this case there is a solution in relation to one-off bonuses: Bonus Sacrifice Arrangement.
Many companies use Salary Sacrifice to enhance the tax-efficiency of pension contributions and other benefits. However, not many employers implement Bonus Sacrifice Arrangement. Bonus Sacrifice Arrangement allows employees to sacrifice their bonus payment and divert funds into their pension pot instead. This provides the following advantages for Employees and Employers:
- The bonus sacrificed receives the full income tax relief (subject to Annual Allowance legislation)
- Employees make National Insurance Contributions Savings on the amount sacrificed
- Any investment growth on the contribution is outside of income tax scope
- Employer National Insurance Savings on the amount sacrificed
- Ability to provide an enhanced reward at no extra cost
Example of a Bonus Sacrifice Arrangement for a Basic Rate Taxpayer