WORKERS expecting a bonus can boost it by as much as £1,200 with a handy trick.
While a bonus is welcome news in the cost of living crisis, the extra cash could go a lot further if you can save it for the future.
1
Many employers offer bonuses to employees as an extra form of compensation for their hard work.
Bonuses can relate to individual performance or employers can award them at a flat rate to all staff.
They’re not guaranteed though, so it could be a good idea to make the most of it if you get one, especially because any bonus you receive will be taxed so you won’t get the whole boost anyway.
Workers making the most of their cash boost now could be £1,200 better off, according to Helen Morrisey, head of retirement analysis, at Hargreaves Lansdown.
READ MORE IN MONEY
Helen told The Sun: “As we head into bonus season some of us will be looking forward to a much-needed income boost.
“The cost of living crisis has shredded our savings, and a bonus of any size can help us get our finances back on an even keel.
“Making the most of your bonus can transform your financial resilience so it’s really important not to fall foul of frittering it away or using it to fund a more expensive lifestyle that then puts you under more financial pressure.”
The financial whizz has put together five easy steps you can follow to boost your extra cash further.
Most read in Money
With workers typically getting a bonus worth 10% of their salary, Helen crunched the numbers based on pay of £40,000 and £20,000 a year – so a bonus of £4,000 and £2,000, respectively.
Though of course the amounts can vary depending on what you get.
From putting cash away for your retirement or saving to buy a house, to setting up your child’s future or clearing your debt – there are handy ways you can boost these amounts.
Of course, it’s important only to take these steps if you can afford it, making sure to assess your finances before you make any decisions.
Put it in your pension – £1,200 boost
The biggest boost you can get from your bonus is putting it into your workplace pension.
That’s because you won’t pay tax on contributions to your retirement thanks to something known as tax relief.
If you get the £4,000 bonus in your bank account you will pay tax on it.
£800 will go on income tax and £400 on National Insurance, leaving you with £2,800.
But divert the cash into your pension before you get paid, and you’ll get the full £4,000.
Helen said: “You can put some or all of your bonus into your pension and save tax.
“You get full tax relief on this, so you don’t pay tax or National Insurance (NI) on what you put in.”
For a bonus of £2,000 bonus you’d get the full amount compared to the £1,400 after tax.
You are automatically signed up to your workplace pension scheme through your job if you’re over 22.
Both you and your boss put in a minimum of 8% into the pension – you contribute 5% and your employer pays at least 3%.
But you can pay in more than the minimum, and making the sacrifice today means in the future when you leave work your annual income from your pot will be higher.
You should speak to your employer about how to make a one-off contribution to your pension, as each company will be different.
But beware that if you put money in your pension, you won’t be able to access it until you retire.
Currently, that’s 55 but the age at which you can access a work or private pension is due to rise to 57 from 2028.
An ISA or a LISA may be nicer – £700 boost
If you don’t want to tie up your cash for quite as long there are other options that will still maximise your bonus.
Another option Helen suggests is putting the cash in a Lifetime ISA (LISA).
She said: “If you qualify for a Lifetime ISA you can contribute some of your bonus in addition to, or instead of contributing to a pension.
“You can pay up to £4,000 per year into a LISA and receive a 25% government bonus.”
A LISA is a type of tax-free saving account that can be used to save for a house deposit for a first first property, or to save for retirement.
A £4,000 bonus, worth £2,800 after tax, put in a LISA would earn £700 on top thanks to the 25% government bonus.
Helen added: “If you put it into a LISA you would receive the 25% bonus bringing the contribution up to £3,500 as income taken from ISAs is also tax-free.”
Based on a £2,000 bonus, or £1,400 after tax, this would increase to £1,750 in a LISA – an extra £350.
Pay off debt or boost your savings – £900 saved
Getting a lump sum payment like a bonus can be a great chance to do things you couldn’t have done before, like clearing debt or adding to savings.
Helen said: “It could help you clear a chunk of expensive debt for instance or help you build your day-to-day savings so you can deal with everyday issues such as boiler repairs and unexpected bills that may otherwise derail your budget.”
If you’re 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 for your savings now especially if you are able to lock your money away for a period of time,” Helen said.
Paying off your debt is also a worthwhile use of your bonus, and could set you up for the future.
Helen offered an example: “If you had a £2,800 balance on your credit card with an APR of 21% and you were paying it off at £100 per month then this would take you 38 months to clear and cost you over £3,700 in total.
“Being able to clear this with your bonus payment would save you a lot of time and money.”
So, if you’d received a £2,800 bonus after tax and cleared your debts with it, you could save yourself £900 in debt repayments.
Or, if you had £1,400 on a card with a 21% APR and paid £100 per month off it would take you 16 months to repay and cost you approx £1,600 in total so paying it off in one go saves £200.
Help your loved ones – £700 boost
You could also use a bonus to boost your loved one’s savings as well.
This could be a good idea if you’ve used up all your of own ISA allowances.
Then you could use some of your bonus to pay into a Junior ISA or Junior SIPP for your children.
Junior ISAs are long-term, tax-free savings accounts for children.
A Junior SIPP is a type of pension for parents and guardians happy to make investment decisions on their child’s behalf.
If you were keen to invest in your child’s future, adding that £2,800 into a SIPP would get them a £700 tax relief boost bringing it up to £3,500.
If you put £1,400 into a SIPP this would result in £350 tax relief – and a total of £1,750.
Plus, investment growth over the long term would also boost its value.
Meanwhile, we reveal how to put away £3,100 a year with three “silent” saving hacks you’ll never even notice.
READ MORE SUN STORIES
Plus, a pensions expert has revealed her secret for boosting your retirement pot by up to £128,000.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
Plus, you can join our Sun Money Chats and Tips Facebook group to share your tips and stories.
