How to financially prepare for your bonus
The average UK bonus is £2,242 and this time of year is when many people receive their annual bonus payment. However, if you don’t plan for this extra income, it could have a negative impact on your finances.
While receiving a bonus is a little ray of sunshine on your finances, it can also cause financial complications for some. So planning for this extra money is essential to ensure you make the most of it.
If you claim universal credit, then receiving a bonus could affect your payment. This is because in most cases any bonus payments you get from your employer are assessed along with your salary and could reduce the amount of Universal Credit you receive in that month.
While this is frustrating and could mean that all your bonus is doing is part replacing the money you have lost as part of your universal credit payment, HMRC advises that usually, you’ll continue on Universal Credit automatically for the next payment.
However, if your bonus is so large that it affects your entitlement for Universal Credit, then the Department for Work and Pensions provides a simple method through which you can return to claiming Universal Credit. If you are concerned that this may affect you, then you can find the Universal Credit contact details on the gov.uk website here.
If you think you may be affected by this, consider what you can do now to start adjusting your budget and plan how you will deal with any changes to your universal credit payment.
If your bonus pushes your income up over £50,000 for the year, then you may have to pay back some of the child benefit you received. This is because the allowance is tapered once you earn over £50,000, with those earning £60,000 or more not being eligible for any of the child benefit allowance.
You can find out more about how this is calculated on the gov.uk website here.
Higher tax bracket
Possibly one of the more obvious effects of a bonus payment is the possibility that it will push you into a higher tax bracket. This means that you could receive a much smaller amount of your bonus after tax that you were expecting.
Take some time to look at your earnings for the year to understand whether you will be affected by this. Your latest payslip will show you how much you have earnt so far in the tax year. You can find information on the income tax brackets on the gov.uk website here.
Affecting your tax code
When HMRC calculate your tax code, they look at your income as a whole and don’t differentiate between your regular salary and your annual bonus.
This means if you receive your yearly bonus early in the new tax year, the system could anticipate that your earnings will always be that high for the remainder of the tax year. The result of which could be a change in your tax code and more tax being taken that you anticipated each month.
The goods news is that HMRC should notify you about any changes they make to your tax code so you will be able to see if a mistake has been made and contact them to correct it.
You can also sign in to your Personal Tax Account and correct it there.
If your income, benefits and pension contributions exceed £150,000, the limit on what you can pay tax-efficiently into a pension each year will start to reduce.
For every £2 your adjusted income goes over £150,000, your annual allowance for pension savings for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000.
Depending on how much your bonus is, it could mean that your annual allowance is affected. You can find out more about how this calculated on the gov.uk website here.
If you think this could be a possibility for you, it’s essential to ensure you have calculated correctly and what that will mean for your finances. If you are not sure in any way, then consider seeking professional financial advice regarding your retirement planning.
A bonus is a wonderful gift, but to make the most of it, be sure to identify if there will be a knock-on effect on your finances. That way you can make the most of your additional income when it arrives.
If you found this information useful, you may also want to check out the following:
- Retirement planning tips for the self-employed
- Don’t wait until the last minute to use your tax allowances
- Is your tax code correct?
MRA specialise in business solutions and are Life Centred Business Consultants based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells