An employee can give up the right to a bonus in exchange for the employer paying the same amount into a registered pension scheme, as long as the contract is varied before the bonus counts as received for tax purposes. Done in time, the bonus is never taxed as earnings, the employer contribution is not taxable on the employee and, for 2026 to 2027, no employee or employer National Insurance is due on it.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questionsHow the cover worksAccountant? Offer cover to your clientsor call 01795 841 310

How does a bonus sacrifice actually work?

A salary sacrifice happens when an employee gives up the right to part of the cash pay due under the employment contract, usually in return for a non cash benefit. HMRC’s Employment Income Manual at EIM42750 confirms that the sacrifice can be of a one off item such as a bonus, not just regular salary. When the benefit is an employer contribution to a registered pension scheme, the sacrificed bonus is not taxable and the employer’s contribution is not taxable on the employee either (EIM42780, relying on section 308 ITEPA 2003).

HMRC’s own guidance for employers gives the simplest version: a £5,000 bonus is sacrificed for a £5,000 employer contribution, and there is no employment income tax or National Insurance charge on the employee because the full amount goes into the pension fund. Pension contributions were also left out of the 2017 optional remuneration rules that removed the advantage of most other sacrificed benefits, so the treatment survives (EIM42780).

For a sacrifice to work, HMRC says at EIM42760 that two conditions must be met. The contract must be effectively varied before the employee becomes entitled to the money, and the true construction of the new arrangement must be that the employee is entitled to less cash plus a benefit, not that the employee still owns the cash and has simply asked the employer to spend it. EIM42766 adds that a genuinely discretionary, non contractual bonus is not part of the contract in the first place, so that second condition does not need to be tested for it.

For the general rules on sacrificing regular pay, see our guide to salary sacrifice schemes. For how a bonus is taxed when it is paid in cash, see how bonuses are taxed.

When must the sacrifice be agreed?

Timing is the whole game. Under section 18 ITEPA 2003, money earnings are treated as received at the earliest of the date they are paid and the date the employee becomes entitled to them (EIM42260). For directors there are extra triggers: the date the earnings are credited in the company’s accounts or records, and the date the amount is determined if that is after the end of the period to which it relates.

EIM42765 says entitlement must be given up before it is treated as received, and that an employee entering a sacrifice should agree the variation well in advance of the payment date. Once the receipt rules are triggered, EIM42260 is blunt: it is not possible to rewrite history by waiving the right to the earnings afterwards.

HMRC’s worked example at EIM42785 shows a successful bonus sacrifice. The employee is told on 31 August that the bonus will be £10,000, is not entitled to payment until 31 October, and returns signed paperwork on 30 September choosing an employer pension contribution instead. The paperwork states that the contractual right to the bonus is given up and that the choice cannot be reversed. Because the bonus is given up before it would have become earnings, the sacrifice works.

For a director, the practical point is that a board minute fixing the bonus, or a journal crediting it to the director’s loan account, can itself be the moment of receipt. The sacrifice has to be in place before either happens. The separate corporation tax timing for accrued bonuses is covered in the nine month rule for unpaid director bonuses.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

How much tax and National Insurance is saved?

The income tax saving is often smaller than people expect. EIM42775 points out that if a pension sacrifice fails, the contribution is treated as the employee’s own and still attracts full tax relief at the employee’s top rate, so the income tax result is frequently the same either way. The real gain is National Insurance.

For 2026 to 2027, employee Class 1 contributions are 8% on earnings between the primary threshold and the upper earnings limit of £50,270 a year and 2% above it, and employer contributions are 15% above the secondary threshold of £5,000 a year. HMRC’s guidance on the coming reform confirms that all employer pension contributions are free of National Insurance, so a sacrificed bonus escapes both the employee and the employer charge.

There can be a further income tax effect where the bonus would push the employee over a threshold that depends on income. The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000, and the High Income Child Benefit Charge claws back 1% of Child Benefit for every £200 of income above £60,000. Because a sacrificed bonus never becomes taxable pay, it can keep income below these points.

What does a worked example look like?

Illustration only. An employee in England earns a salary of £100,000 and has no other income. A £10,000 bonus is due.

Item Bonus paid in cash Bonus sacrificed to pension
Income tax at 40% on the bonus £4,000 Nil
Extra tax from losing £5,000 of personal allowance £2,000 Nil
Employee National Insurance at 2% £200 Nil
Amount kept or invested £3,800 in cash £10,000 in the pension
Employer National Insurance at 15% £1,500 Nil

If the employee instead took the bonus in cash and paid it into a personal pension, income tax relief would eventually restore most of the income tax, but the £200 and the employer’s £1,500 of National Insurance would be lost. Some employers add part of their saving to the contribution; that is a commercial choice, not a requirement.

What limits and conditions still apply?

  • Annual allowance. The employer contribution counts towards the pension annual allowance, which is £60,000 for 2026 to 2027 and is tapered where threshold income exceeds £200,000 and adjusted income exceeds £260,000. See the pension annual allowance and carry forward.
  • National Minimum Wage. HMRC’s guidance says a salary sacrifice must not reduce cash earnings below the National Minimum Wage rates, and employers must have procedures to cap deductions.
  • Employer relief. Under section 196 Finance Act 2004 the company can deduct the contribution only in the period of account in which it is actually paid (PTM043200). Contributions for controlling directors also face the wholly and exclusively test; see when company pension contributions are deductible.
  • Evidence. HMRC says that to be satisfied a change took effect at the right time, it would need to see evidence of the contract variation and payslips from before and after it.

What changes from April 2029?

The government has announced that from April 2029 only the first £2,000 a year of employee pension contributions made through salary sacrifice will be exempt from National Insurance. Anything above that will attract both employee and employer contributions, although the contributions remain free of income tax within the usual limits, and employer contributions made outside a sacrifice stay free of National Insurance. A single large bonus sacrifice is exactly the kind of arrangement that will exceed the cap, so employees planning several years ahead should factor this in. HMRC has said further guidance will be published before April 2029.

What mistakes come up most often?

  • Agreeing the sacrifice after the bonus has been paid, announced as an entitlement, credited to a director’s account or fixed by a board resolution.
  • Paperwork that leaves the employee able to change their mind and take the cash later, which undermines the argument that the right to cash was given up.
  • Ignoring the knock on effect on pay based figures. HMRC notes that a sacrifice can reduce statutory payments and earnings related benefits, and Statutory Maternity Pay is based on earnings actually paid in the relevant period; see salary sacrifice during maternity leave.
  • Overlooking the annual allowance when a large bonus is added to regular contributions.
  • Payroll still showing the full bonus as gross pay with a deduction afterwards. EIM42770 accepts this format if the contract really was varied, but where there is no signed agreement HMRC treats the payslip as evidence of what was agreed.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Related cover: Employers' liability insurance is a legal requirement for most employers. Ask for a quote or call 01795 841 310.

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.