Your employees can choose to give up some or all of their contractual bonus and have it paid into their pension instead. It offers benefits to both you and your employees.
Your employees should make sure any bonus exchange doesn't take them over the £60,000 annual allowance for pensions. The current rules let them pay up to 100% of their salary, or £3,600 gross a year into their pension, whichever is higher, and still get tax relief. But they also need to remain within the annual allowance of £60,000, This includes any contributions made by the employee, you the employer, or any third party. Any amount paid over this would incur a tax charge.
What is bonus exchange?
Bonus exchange works in a similar way to salary exchange, sometimes referred to as salary sacrifice. Instead of receiving their bonus as part of their salary, employees can agree to have some or all of their bonus paid directly into their pension.
You then pay this amount into their pension as an employer contribution. Your employees don't pay income tax or National Insurance on the exchanged bonus amount.
Bonus exchange may not be suitable for all employees. It may depend on their personal financial situations. Employees won’t be able to access their pension fund until age 55 (57 from April 2028), so they need to make sure it’s the best way to use their bonus and that they don’t need it for something else. As with all pensions the value of investments can go down as well as up, and your employees may not get back the original amount invested in their plan.
How does bonus exchange work?
If you decide to offer bonus exchange to your employees, they'll have to decide in advance of getting their bonus how much they want to exchange. Depending on when you're able to tell your employees how much bonus they’ll receive, they may have to make this decision before they know how much bonus they’ll get.
If that’s the case, they could decide that they’d like to exchange:
- A percentage of their bonus (for example, 50%) or
- an amount in pounds, up to a specific limit (for example £10,000).
Benefits to you
As an employer you can make savings on your National Insurance contributions. Offering bonus exchange to your employees can help them save for their retirement more efficiently.
Benefits to your employees
Your employees may not realise that paying their bonus into their pension could provide significant tax benefits. They could save on income tax and National Insurance and increase their pension savings at the same time.
It provides a good opportunity for employees who are behind on their pension savings, or for those who are worried they're not going to have enough at retirement to boost their pension savings.