For some people, the New Year may bring positive cash flow with either pay rises or annual bonuses. If you are looking forward to an annual bonus, Why not use this opportunity to consider how this can impact your short-term and long-term finances? Hargreaves Lansdown has put together these top tips for how to use your bonus this year. Whether you want to pay off debt or pay into a LISA or ISA, many options are available. Read ahead for some ideas, and feel free to share your own with us below.
Making the most of your bonus can positively impact your financial resilience.
You can use a bonus sacrifice scheme to put some of it into a pension, saving you tax and boosting your retirement.
ISAs can be a very tax-efficient place to put your bonus. If you invest in it, you could see it grow.
It’s important not to fall foul of lifestyle creep.
Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown:
“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. Hence, it’s really important not to fall foul of frittering it away. Or use it to fund a more expensive lifestyle that puts you under more financial pressure. Using bonus sacrifice to boost your pension or putting it in an ISA can help you save on tax and boost your savings for the long-term.”
How to get the most from your bonus
1. Put it in a pension – and save some tax.
Ask your employer if they operate a bonus sacrifice scheme, where 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 NI on what you put in.
As well as boosting your pension, it also reduces your total pay, which can help you avoid the child benefit tax charge limit. For instance, if a bonus takes the income of one parent over £50,000 then the charge kicks in and for every £100, they earn over £50,000 they have to pay back 1% of the child benefit. If you earn over £60,000, you have to repay it in full.
2. An ISA or a LISA may be nicer.
You can also boost your investments by putting your bonus into a stocks and shares ISA. You can contribute up to £20,000 per year to an ISA with income taken tax-free with both cash and stocks and shares ISAs available.
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. This could suit those using a LISA to purchase their first property or save for retirement. It’s worth saying that the £4,000 LISA allowance is included in the overall £20,000 ISA limit.
3. Pay off debt or boost your savings.
A lump sum can allow you to do things you wouldn’t ordinarily be able to. It could help you clear a chunk of expensive debt. Or help you build your day-to-day savings (an emergency fund) to deal with everyday issues such as boiler repairs and unexpected bills that may otherwise derail your budget.
If you will save it, searching the market for the best deal is important. After years of rock bottom rates, you can get much more for your savings now. If you can lock your money away for a period of time, you may get even better interest rates.
4. Help your loved ones.
If you’ve used up all your own allowances, you could use some of your bonus to pay into a Junior ISA or Junior SIPP for your children. You could also boost your partner’s pension by paying into that. You can contribute to their pension even if they are working, and they will benefit from tax relief as long as total contributions stay below their annual allowance.
5. Don’t fall foul of lifestyle creep.
We can have the best intentions when we get our bonus, but as the months go by, we get tempted to buy more things – so-called lifestyle creep. Over time, your bonus will be depleted. Making you more reliant on next year’s bonus – which may or may not come – to meet your needs. If you plan to use your bonus and can put it to work, this is less likely to happen.