What is a bonus exchange?

‍Bonus exchange (also called bonus sacrifice) is an arrangement where an employee gives up all or part of a cash bonus in exchange for an equivalent employer pension contribution. This reduces income tax and National Insurance bills for both the employee and the employer.

Bonus exchange arrangements are governed by employment law and HMRC rules and can be complicated. You should make sure that any bonus scheme and any related bonus exchange arrangements you may have in place are effective in terms of both employment contractual arrangements and tax rules.

We strongly recommend that you consult with your usual employment lawyer and company tax/payroll adviser to avoid any problems.

How to make a bonus exchange payment to Smart Pension

You can do a bonus exchange in two ways.
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1. Through your normal payroll file upload and direct debit mandate process – in the payroll file the lump sum amount must be put in the ‘employer’ column.
   As a refinement to this option, you can pay the lump sum through the Pay Now feature, if the contribution needs to be paid sooner than the normal Direct Debit process. Find out more about the pay now feature.
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2. From your business bank account 
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Bonus exchange payments will count as employer contributions and not member contributions or additional voluntary contributions. You can find guidance and lots of useful tips and reminders about the payment process on this webpage for employers.
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The benefit of a bonus exchange 

A bonus exchange can result in National Insurance contribution (NIC) savings  for both employers and employees. 

Any such savings in National Insurance will only be realised, and tax complications/penalties avoided, if any bonus exchange is correctly documented and implemented, in line with HMRC rules. Find out more about tax relief and take a look at the ‘HMRC guidance’ section at the end of this support article.
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Timing of a bonus exchange payment

We are not tax experts or advisers, but as we understand it, normally you cannot exchange (‘sacrifice’) a bonus once you’re entitled to it and/or have been told about the specific bonus amount.

Depending on the specific type of bonus scheme you operate, this usually means that your employee needs to have told you in writing the amount or proportion of bonus they wish to exchange, before you’ve told your employee their bonus amount.

Please make sure you ask your employment lawyer and/or tax adviser about the content and timing of the communications between you and your employees. This will ensure  the bonus exchange meets all the relevant requirements to be effective for contractual and tax purposes.
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HMRC guidance

You can find HMRC guidance on employer contributions to registered pension schemes and salary/bonus exchange arrangements in  the following HMRC manuals and documents:
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• PTM043200 – Contributions: tax relief for employers: conditions
• BIM4600 – Specific deductions: pension schemes: contents
• BIM46075 – Specific deductions: pension schemes: employer contributions linked to salary sacrifice arrangements
• EIM42750 – Salary sacrifice: what is a salary sacrifice: arrangement of guidance
• EIM42760 – Salary sacrifice: conditions for successful salary sacrifice: summary
• EIM42765 – Salary sacrifice: conditions for successful salary sacrifice: timing
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Key points to be aware of

• You may wish to speak to your company tax adviser about tax relief on the employer contribution (resulting from the bonus exchange) and obtaining appropriate corporation tax relief in the relevant company financial year.
• Smart Pension is not authorised to provide guidance or advice on the effectiveness or operation of bonus schemes and/or bonus exchange arrangements – we can only assist with questions about the payment processes.
• This guidance is provided for general informational purposes only and is intended strictly for participating employers. Smart Pension acts solely as a pension scheme administrator and is not authorised to provide legal, financial, or tax advice. Bonus exchange (bonus sacrifice) arrangements involve complex employment law and HMRC requirements. Employers must consult their own employment legal counsel and corporate tax or payroll advisers to ensure any scheme is legally binding and tax compliant before implementation and any questions about the operation and effectiveness of your bonus scheme and any bonus exchange arrangements should be directed to your employment lawyer and/or company tax adviser
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If you have further questions about bonus exchange, contact our support team on 0333 666 2626, Monday to Friday, 9:00am to 5:00pm.

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