Worked examplesPay and bonuses
The £10,000 bonus that leaves you £6,320 worse off
A bonus should be good news. Land it in the wrong place and it can cost a family more than it pays. Here's how that happens, and how putting half of it into a pension turns the result around.
The short answer
−£6,320
is what a £10,000 bonus leaves this family.
On a £95,000 salary with a child in nursery, the bonus crosses £100,000 and costs more in tax and lost childcare support than it pays.
The working
- The bonus
- +£10,000
- Income tax, including lost allowance
- −£5,000
- National Insurance
- −£200
- Childcare support lost
- −£11,120
- What the bonus leaves you
- −£6,320
Put £5,000 of it into a pension and the same bonus leaves £2,900 in cash plus £5,000 saved.
Bonus letters go out, people celebrate, and a few weeks later some of them discover their family is worse off than if the bonus had never been paid. It isn't a payroll mistake. It's what happens when a bonus pushes you over a threshold that is tested on your income for the whole year.
The scenario
| Salary | £95,000 |
| Bonus | £10,000 |
| Partner's salary | £45,000 |
| Children | 2 |
| Nursery (one child) | £1,600 a month |
Where the £10,000 goes
The bonus takes this parent from £95,000 to £105,000. Crossing £100,000 does two things at once:
- The family loses its funded childcare hours and Tax-Free Childcare, worth £11,120 a year to them. (The £100k cliff edge worked example shows how that figure is reached.)
- The parent starts losing their tax-free personal allowance, £1 for every £2 over £100,000. They lose £2,500 of it, which adds £1,000 of tax.
| Income tax (including the lost allowance) | −£5,000 |
| National Insurance | −£200 |
| Childcare support lost | −£11,120 |
| What the bonus leaves you | −£6,320 |
A £10,000 bonus that costs £16,320 in tax and lost support. The family would have been better off without it.
The fix: £5,000 into the pension
The childcare test is on adjusted net income, and pension contributions come off it. If this parent puts £5,000 of the bonus into their pension through bonus sacrifice, their adjusted net income lands at exactly £100,000.
The childcare support comes back, and so does the personal allowance.
+£2,900
in cash, plus £5,000 in the pension, from the same bonus.
£14,220 better off in total than taking it all as cash.
The working
| All as cash | £5,000 into the pension | |
|---|---|---|
| Cash from the bonus | −£6,320 | +£2,900 |
| In the pension | £0 | +£5,000 |
Not just the £100k line
Bonuses do damage at other thresholds too.
The Child Benefit band, £60,000 to £80,000. On £62,000 with two children, a £10,000 bonus loses £4,000 to income tax, £200 to National Insurance and £1,169 to the Child Benefit charge. You keep £4,631, or 46p in every pound. How the charge works, and why it makes pension payments in that band cheap.
The 60% band with a student loan. On £100,000 with a Plan 2 loan, a £10,000 bonus loses 40% to income tax, another 20% through the vanishing personal allowance, 2% to National Insurance and 9% to student loan repayments. You keep £2,900: 29p in every pound. The flip side is that sacrificing the whole bonus into a pension costs just £2,900 of take-home pay for £10,000 in the pension.
Whether that student loan will ever be repaid in full is a separate question, and for many graduates the answer is no. Should you overpay your student loan? covers how to tell.
Bonus sacrifice or a personal pension?
There are two ways to put a bonus into a pension, and they don't cost the same. Same person, £100,000 salary, Plan 2 loan, £10,000 bonus:
| Bonus sacrifice | Personal pension | |
|---|---|---|
| Into the pension | £10,000 | £10,000 |
| Income tax relief | £6,000 | £6,000 |
| National Insurance saved | £200 | £0 |
| Student loan saved | £900 | £0 |
| Cost to you | £2,900 | £4,000 |
Bonus sacrifice reduces the pay that NI and student loan repayments are worked out on. A personal pension only gets income tax relief, and the higher-rate part has to be claimed back on a tax return.
The catch: sacrifice has to be agreed with your employer before the bonus is paid, so ask early. And from April 2029, the National Insurance saving on salary sacrifice is capped at £2,000 of contributions a year.
Before you decide
- The tests cover the whole tax year, 6 April to 5 April. A bonus paid in March counts as much as your salary.
- Pension money is usually locked away until 57 (55 until April 2028).
- £5,000 isn't the only choice. Any amount that brings you back under a threshold does the job.
- A salary sacrifice car lowers your salary all year round, which can leave room under a threshold for a bonus.
- A pay rise works the same way as a bonus, every year. So can going part-time, in reverse: dropping a day can bring a high earner back under £100,000.
General information, not financial advice. 2026/27 rates for England, Wales and Northern Ireland; Scottish income tax differs and funded hours are England-only. Speak to a regulated adviser before acting.