June 16, 2024

Six ways workers can shield their bonuses from the taxman

If you want better access to your bonus, but still want to save it in the most tax-efficient way, then Shaun Moore, head of tax policy at Quilter, recommends utilising your Isa allowances.

“This can help shield your wealth from tax,” said Mr Moore. “While you will still end up paying income tax and National Insurance on the bonus, you can ensure that any income of growth avoids tax.”

You can pay up to £20,000 a year into your Isa, and any money within the wrapper is free from income tax, capital gains tax (CGT) and dividend tax.

Mr Moore said: “Leaving money outside these wrappers, can result in you being out of pocket, and use up your tax-free allowances.

“For example, 3pc capital growth on £20,000 wastes 20pc of the capital gains allowance, 2pc dividend yield would waste 80pc of your dividend allowance and 1pc interest on your savings uses up 40pc of your personal savings allowance.”

Tax paid on a £10,000 bonus: £4,200

Tax saved: £0 on bonus, but has future tax benefits

Get the tax back

If you have a higher risk tolerance when it comes to investing, you could consider looking at tax-efficient investment schemes.

Mr Hollands suggests a Venture Capital Trust – specialist investment companies that invest in small, earlier-stage British growth companies which are unquoted or issuing shares on the Alternative Investment Market (AIM).

“These are regarded as higher risk investments,” said Mr Hollands. “But to incentivise people to back such business, the government provides a cocktail of tax perks.”

If you invest in a VCT new share issue, you can claim a 30pc income tax credit off the sum invested via your tax return. Therefore, if you invested £10,000, you could wipe £3,000 from your tax bill. You need to hold the shares for five years, otherwise you would have to repay the tax credit.

Tax paid on a £10,000 bonus: £1,200

Tax saved: £3,000

Use the money wisely

Whether you’re keeping all or just some of your bonus, consider using the cash to save you money elsewhere. For example, Nimesh Shah, from the accountancy firm Blick Rothenberg, suggests using the money to overpay your mortgage.

Assuming a 5pc interest rate, paying £10,000 towards your mortgage costs would reduce your bill by £500 a year, for example. 

“Given higher interest rates, people may be attracted to use their bonus to overpay on their mortgage,” said Mr Shah. “Unfortunately, there’s no tax relief for making overpayments, but it should reduce your monthly interest cost and allow you to pay off your loan sooner.”

Mr Shah also suggests making a gift to your children, which is a tax-efficient option for estate planning. Gifts are free from inheritance tax after seven years so, providing you live for the next seven years, a £10,000 gift to them now would save a potential £4,000 inheritance tax bill if the money formed part of your estate in the future.

Tax paid on a £10,000 bonus: £4,200

Tax saved: £0 on bonus, but has future tax benefits

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