Not sure what to do with your bonus? Here are 5 actionable tips

Receiving a bonus is a significant achievement and a tangible acknowledgement of your dedication and hard work.

While it may be tempting to splash out and treat yourself, taking a more strategic approach to managing this windfall could yield more fulfilling long-term benefits. So, prioritising how you’ll use your bonus before it reaches your bank account could make it easier to make your money work for you rather than have it simply disappear.

The choice of what to do with the money is up to you, but I’m here to help you make informed decisions that align with your financial goals.

So, let’s get started with these five tips for putting your bonus to work.

1. Funnel your bonus money into pension pots for tax efficiency

For a strategy that could benefit you in the long term, you could contribute your bonus to your pension, which has multiple benefits.

• Paying your bonus directly into your pension (either through your employer as a bonus sacrifice or after you receive it) could help reduce your Income Tax burden.
• Your bonus might push you into a higher tax band, so paying it into a pension could help you avoid this.
• If you opt for bonus sacrifice, your employer might pass on saved NI contributions from your bonus into your pension.
• Your contribution is likely to receive tax relief, further boosting its value.
• You don’t have to pay it all in, meaning you can save for the future and keep some of your bonus aside as cash.

It’s worth noting that, if you put your bonus into your pension, the money won’t usually count as income for loan and mortgage applications.

Remember, you can typically make contributions of up to £60,000 in a single tax year, known as the “Annual Allowance”, while still benefiting from tax relief. If your payments (along with any third party contributions) exceed this sum, you may be liable for a tax charge.

2. Put your bonus in an ISA

Not everyone is comfortable with locking away their entire bonus within a pension. So, if you don’t have immediate plans to spend the money, putting those funds to work in an Individual Savings Account (ISA) may make the most sense for you.

There are several types of ISAs.

• Cash ISA – A savings account that lets you earn tax-efficient interest on the money you save.
• Stocks and Shares ISA – This lets you invest in stocks, shares, and funds tax-efficiently.
• Lifetime ISA (LISA) – You can save up to £4,000 each year, and the government will add a 25% top-up if you use the money when buying your first home or drawing an income once you turn 60.
• Innovative Finance ISA (IFISA) – IFISAs let you lend money in return for interest payments. So, they typically offer higher interest rates than those available on Cash ISAs or other types of savings accounts, but they can carry more risk.

An ISA can help your money grow tax-efficiently, as you won’t pay Income Tax, Capital Gains Tax, or Dividend Tax on any returns you generate.

Keep in mind that there is a maximum amount that you can invest into your ISAs, with the annual limit being £20,000 until 2030.

ISAs allow you to grow your wealth while maintaining a degree of accessibility. Keep in mind that with a Stocks and Shares ISA, the value of your investment may fall. So, if you plan on withdrawing money from your account, consider your timing carefully.

3. Support your child’s future by saving or investing into a Junior ISA

Your bonus can be a powerful tool for helping build your child’s financial future, so you could consider putting this money into a Junior ISA (JISA).

These accounts offer tax-efficient growth and could provide a substantial financial foundation for your child as they transition into adulthood. You could open a Cash JISA or a Stocks and Shares ISA on behalf of your child, which function very similarly to their adult counterparts.

If you save or invest your bonus into a JISA and consistently contribute over several years, the potential for growth is significant.

According to Smart Money Tools, if you were to invest £8,000 as a one-off when your child is five, your investment could be worth £13,429 when your child turns 18, assuming a 5% annual return, medium risk, and 1% fees.

If you were to contribute that same amount but add a £100 monthly contribution, the funds could be worth £33,724 by the time your child reaches adulthood.

Keep in mind that the annual allowance for a JISA is £9,000, and as with adult ISAs, no Income Tax, Dividend Tax, or Capital Gains Tax will need to be paid when the money is withdrawn.

4. Make yourself more financially secure by clearing debt and building an emergency fund

One of the most straightforward ways to use your bonus is to strengthen your financial security. It may not be glamorous, but it could make you more financially resilient.

If you have high-interest debt, it may be prudent to pay this off first, particularly if your savings wouldn’t earn as much in interest as the debt would cost you.

For example, if you have a personal loan that charges you 15% interest but your savings account earns 4.5%, it may make more sense to pay off the debt before putting the money away. Doing this could free up significant cash flow and reduce your overall financial burden.

Once expensive debts are cleared, you may be able to take any surplus income and funnel it into building an emergency fund.

Having 3 to 6 months’ worth of expenses set aside in an emergency fund can act as a safety net in the event of unexpected life events.

5. Find a balance by spending half and saving half

You may feel like you deserve to enjoy the fruits of your labour, and you certainly do! If you’d like to treat yourself, you could consider adopting a “spend half, save half” approach, which may offer the best of both worlds.

This strategy allows you to indulge in some immediate gratification while still contributing to your long-term financial goals. By allocating a portion of your bonus to discretionary spending and sticking to your limits, you can enjoy life today while continuing to build a secure financial future for yourself.

Get in touch

Looking for more creative ways to put your bonus (and any other financial windfall) to work? Email Marnel.Stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more about how I can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

Pension savings are at risk of being eroded by inflation.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.  We recommend that the investor seeks professional advice on personal taxation matters.

The Financial Conduct Authority does not regulate taxation advice, National Savings products or deposit accounts.