As the tax year end approaches and bonuses are announced, many will be thinking about maximising pension funding to use up their annual allowance and reduce their tax liability. With National Insurance relief on salary sacrifice into pensions being curtailed to just the first £2,000 from April 2029, there is a growing urgency for individuals to take advantage of the full NI savings available now under the current rules.

Triggering lost allowances and benefits

Large bonuses can result in tax allowances and benefits being lost when income is pushed above certain thresholds:

• Personal Allowance - reduces by £1 for every £2 of income over £100,000 and is fully lost at £125,140.
• Personal Savings Allowance - falls from £1,000 (basic rate) to £500 (higher rate) and to £0 at additional‑rate income (£125,140+).
• Starting Rate for Savings - the £5,000 0% band is reduced by £1 for every £1 of non-savings income above the personal allowance and fully lost at £17,570
• Marriage Allowance Eligibility - cannot be transferred to an individual once they become a higher‑rate taxpayer.
• Child Benefit - withdrawn via the High Income Child Benefit Charge at a rate of 1% for every £200 income that exceeds £60,000 and fully lost at £80,000.
• Tax‑Free Childcare - lost entirely once either parent’s income exceeds £100,000.
• 30 hours of free childcare - also lost if either parent earns over £100,000.

Contributing to a pension can solve these issues by reducing Adjusted Net Income so that tax reliefs, allowances and benefits can be reinstated. 

In addition, the pension annual allowance starts to reduce when threshold income exceeds £200,000 and adjusted income exceeds £260,000. If a pension contribution reduces threshold income to below £200,000 then tapering will not apply. But this would have to be made as a personal contribution and not through salary sacrifice.

How does bonus sacrifice work?

Bonus sacrifice involves the employee agreeing to give up some or all of their bonus in exchange for an extra employer contribution to their pension. As the employee's remuneration is reduced, they and their employer will pay less National Insurance (NI).

The employer may also pay some, or all, of their NI saving into the employee’s pension too - overall, it won't cost them any more than paying the bonus.

The NI savings for basic rate taxpayers are even greater as they pay NI at 12% on income over £12,570. So they effectively get 32% tax relief on pension contributions paid by sacrifice.

Avoiding the High Income Child Benefit Charge

Child Benefit can be taken for granted - but it can also be taken away. Where someone in the household earns more than £60,000, the benefit begins to be withdrawn by way of a tax charge - at the rate of 1% of the benefit for every £200 over this threshold - with Child Benefit being cancelled out completely for those on £80,000 or more. This could mean losing out on £3,148.60 for a family with three children.

A bonus paid late in the tax year could mean the total income tips over the £60,000 threshold. The solution could be as simple as making a pension contribution as this reduces the adjusted net income used to determine eligibility. Considering a £10,000 bonus again, this will reduce adjusted net income by £10,000, whether this is done as an individual contribution or under a sacrifice arrangement. But using the latter means benefits will be boosted further if the employer NI savings are paid in too.

Consider again an individual with a salary of £60,000 and an annual bonus of £10,000. To retain the full child benefit a gross pension contribution of £10,000 needs to be made. The effective rate of tax relief on this payment (after adding back all tax savings made, including any employer NI savings due) works out as:

Retaining personal allowances

In the same way, a larger than expected bonus could mean clients miss out on their personal allowance. The allowance is eroded once adjusted net income is greater than £100,000, until there's no personal allowance at all for anyone with income over £125,140. A pension contribution can help clients bring their income back down below £100,000 to retain their personal income tax allowance.

Someone with total income of £125,140 could get effective tax relief of 60% on a pension contribution of £25,140. This would be just enough to retain their personal allowance. That’s 40% tax relief on the £25,140 going into their pension and a further 20% by getting their personal allowance back. And of course, this can be boosted further by NI savings if it can be achieved by bonus sacrifice. 

Summary

With the window closing on the generous NI savings currently available through salary and bonus sacrifice, employees now have only three years to take advantage of the full relief before the April 2029 cap reduces NI relief on contributions to just £2,000. Making use of bonus sacrifice now means more can be directed into retirement savings rather than lost to tax and NI, offering the opportunity to accelerate retirement provision while the available relief is at its most generous.

Salary sacrifice will still offer advantages post April 2029, even for those affected by the NI relief reduction. They will benefit from the immediate tax relief on the contribution and avoid the hassle of reclaiming any higher rate tax relief through self-assessment.

Bonus sacrifice is subject to the employer’s agreement and is only possible before the bonus is received.

Note: All figures are based on main UK tax rates and allowances for the 2025/26 tax year. The income tax rates and bands for Scottish taxpayers will differ.