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Bonus season – 5 steps for making the most of a bonus

The cost-of-living crisis might have shredded your savings but what can you do with your bonus that might put you back on even ground?

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Heading into bonus season, some of us will be looking forward to a much-needed income boost. The cost-of-living crisis has shredded savings, and a bonus can help get our finances back on even footing.

Making the most of your bonus can transform your financial resilience so it’s important not to let it get frittered away. Using it to boost your pension or putting it in an ISA could help you save on tax and build up your savings pot.

This article isn’t personal advice. If you're not sure if an action is right for you, ask for financial advice.

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Remember, pension and tax rules can change, and benefits depend on your circumstances. You also can’t usually take money out of a pension until at least age 55 (rising to 57 from 2028).

How to get the most from your bonus

1

Add it to your pension pot

Ask your employer if they run a bonus sacrifice scheme where you can put some or all of your bonus into your pension. You still get full tax relief on this, so you don’t pay tax or national insurance (NI) on what you put in.

As well as boosting your pension, this would lower your total pay, which can help you avoid the child benefit tax charge limit if you’re close to it and you are claiming it. If a bonus takes the income of one parent over £50,000 then the charge kicks in and for every £100 over that, they have to pay back 1% of their child benefit. If you earn over £60,000 you have to repay child benefit in full.

2

Use your ISA allowance

You can put up to £20,000 per tax year into an ISA and shelter it from UK income and capital gains tax. There are options for both saving and investing with a Cash ISA or Stocks and Shares ISA.

If you qualify for a Lifetime ISA (LISA) you can add up to £4,000 of your ISA allowance to a LISA each tax year. The government will add a 25% bonus to whatever you contribute. The LISA is aimed at helping you purchase your first property or save for later life.

You can only open a LISA between 18 and 39, and once you hit 50, you can’t add any more money. Any withdrawal before 60 that isn’t used for a qualifying first home normally comes with a 25% penalty so you could get back less than you put in.

3

Pay off debt or boost your savings

Having a lump sum means you can do things you wouldn’t normally have the money for. It could help you clear a chunk of debt or boost your day-to-day savings.

If you are going to save it, then it’s important to search the market for the best deal. After years of rock bottom rates, you can get much more from your savings now especially if you’re able to lock your money away for fixed periods.

4

Help your loved ones

If you’ve used up all your own allowances, then you could use some of your bonus to pay into a Junior ISA or a Junior SIPP for your children if you have any. You could also boost your partner’s pension by paying into that.

You can pay up to £2,880 into a non-working partner’s pension and they will get tax relief bringing it up to £3,600. You can still add to their pension even if they’re working and they will benefit from tax relief as long as the total contributions stay below their annual allowance.

5

Avoid the lifestyle creep

We can have the best of intentions when we get our bonus but as time goes by, there will be temptations to buy things we might not really need. This is called lifestyle creep.

Over time your bonus will get used up making you more reliant on next year’s bonus – which might or might not come. If you plan for how to use your bonus, this is less likely.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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Written by
Helen-Morrissey
Helen Morrissey
Head of Retirement Analysis

Helen raises awareness of key retirement issues to help people build their resilience as they move towards their later life.

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Article history
Published: 17th January 2024