What to do with bonus

[MoneyMoneyTax]

I’m in need for some quick advice. Say your monthly gross salary is 5K and you end up with 8K bonus this month what would be the best way to deal with it? Would it be best to maximise your pension contribution for the month? There’s no option to spread the payments.

That's brave of you to ask MN.

Pension or take the hit on tax and enjoy!

Depends, last year I added it all to my pension, we had a small inheritance so did not need the cash as much. This year I have increased my monthly pension contributions anyway, so I took the cash and am enjoying it with my family.

Tax will work itself out over the year anyway so whatever you do doesn't have happen this month.

What's best to do with it depends on your overall financial position, which you haven't disclosed.

Put it in an ISA where you pay tax on it via your pay (on the way in), but nothing 'on the way out' of the ISA.

OR

Put it in your pension and you can claim back your PAYE tax (on the way in) - so a 25-40pc increase, but then you pay tax on the monthly pension you get (on the way out).

OR

Pay off debts.

You would need to make some assumptions about the future and do some calculations to work out which is likely to be the best option for you in the long run, but basically none of the above is a terrible idea.

PS: Congratulations on your bonus! Well done 😊

Add to a Stocks and Shares ISA, your pension or a diversified General Investment Account.

(Obviously if you have any higher interest debts, pay off those first!)

Please explain what you mean by ‘tax will work
out over the year’. Do you mean I’ll get back any tax that’s over and above my current tax bracket back?

Thank you! 😊

We don’t have much debt, apart from the mortgage.

@MoneyMoneyTaxyes. If the company you work for doesnt fully adjust for this and higher eater tax is deducted this month. Then at the end of the financial year, if your earnings for the year as a whole have not exceeded the tax bracket, then you will receive a tax rebate. This has happened to me before for the same reason.

assuming that your £5k salary is pre tax then we have similar situations.

in terms of what to do with the bonus, if you can adjust your pre-tax pension deduction through your workplace then maxing that out is a good idea. Alternatively an ISA is good. If you’re investing for retirement then a Lifetime ISA is a great bet, though you’ll only be able to pay in £4k each financial year, the government then Add a further 25% of whatever you’ve paid in so it’s nice free money.

What makes you say that??

The lifetime ISA is a very good shoot too. Thank you

I am hoping to be getting a similar sized bonus at the end of the month. Putting £5k against the mortgage and using a part of the rest to buy a good sewing machine.

We all have different priorities. My priority now is to get the mortgage paid off. Not tax efficient but important to me. The sewing machine is for my hobby.

Premium bonds

Can you get your employer to put at least some of it into your pension as an employer contribution? That way you can receive it gross, rather than having tax deducted off of it first.

Well done on the bonus though - cracking sum!

Wine, women and song 🍷 👧 🎵.

But if you insist on being sensible, 5k a month gross plus an 8k bonus would bring you to £68k. Putting anything above £50k in a pension will gain you higher rate tax relief on the way in, and unless you’re sitting on an inheritance or something you’re highly likely to be a lower rate taxpayer in retirement. So up to £18k total over the whole year into the pension will be tax efficient. Also vote for the LISA suggestion if you prefer.

If your objective is to minimise the income tax liability the only real option you have is to pay it into your pension. If you are salary sacrifice then any tax relief will be sorted for you automatically, if you aren't salary sacrifice you will likely need to claim back the additional tax relief on an annual tax return.

People have been quick to make recommendations on what you should do with this money, but they know next to nothing about your personal circumstances, so whilst they may be well intentioned you need to consider what is right for your own circumstances.

If you have no high interest debt and have a decent cash emergency fund of 3-6 months, then yes it would probably make sense to either invest most of it for the future. Pensions and ISAs have their own pros and cons, both good options.

For me personally, when I get my annual bonus I know paying it into my pension makes sense financially in terms of the likely best return due to tax relief. I don't usually do it though, mainly because my pension is in quite a good place already and I actually value being able to have more flexibility with that bonus money, even though I know ill be taxed on it.