With recent proposals to liberalise withdrawals from pension plans at retirement, pensions have become a much more interesting subject to both employers and employees alike.
When it comes around to bonus time the use of pensions rather than payments through salary can result in extra money for employees and financial savings for employers.
Example.
Jack works for ABC design and is paid a salary of £25,000 per year this year he has earned a ‘bonus’ of £2,500. Assuming Jack has standard tax code and no student loans his take-home pay would be £21,654 for the year including his bonus, £19,954 without the bonus. So the bonus increases Jack’s annual take-home pay by £1,700.
Now if Jack wanted to put that £1,700 into a pension from his bank account by direct debit the tax rebate added to it would make the total contribution £2,125.
If however, Jack asked ABC design to pay the £2,500 bonus straight into his pension instead of paying it to him then it would be worth £2,500 instead of £2,125 so Jack is £375 better off because of the national insurance saved. So £1,700 in take-home pay is converted to £2,500 in pension contributions.
Why would an employer want to go through the administration of offering an employee the option? Employers national insurance contributions are also reduced – in this example by £345 over the year. As an incentive, some employers may offer to ‘share’ this saving with their employees in the form of an even larger pension contribution.
So if your an employee due to a bonus and retirement planning is a priority for you why not ask your employer if they would consider a pension contribution instead or if your an employer and bonus time is coming perhaps this is something you would like to consider to reward employees and cut your NI bill?
Want help with this or other creative ways to manage your company pension scheme to optimise employee reward and minimise employer costs then please get in touch.