Bonus season 2022 survey: will you make investments, save or spend?

This 12 months is about to be a bumper one for bonuses, as a result of excessive earnings generated in finance through the previous 12 months. However these fortunate sufficient to obtain one are weighing the affect of upper taxes, rising inflation and rates of interest as they plan to deploy their money.

Three-quarters of FT readers say their 2022 bonus will probably be larger or considerably larger than final 12 months’s pay out. Our latest ballot of practically 900 readers discovered that 40 per cent anticipated six-figure sums.

One in 5 readers stated their complete bonus could be valued between £100,000 and £250,000, and one in three anticipated to be awarded between £10,000 and £50,000.

We additionally requested readers whether or not they supposed to take a position, spend or save the money component of their bonus, and why.

“In relation to bonuses, excessive earners are likely to drift in direction of two very totally different extremes,” says Maike Currie, head of private finance at Constancy. “They’re both very wise and make investments the lot, or dwell past their means all year long, and depend on the bonus cash to repay money owed they’ve racked up.”

You gained’t be shocked to study that 58 per cent of the FT readers polled stated investing the cash was their major intention. Greater than a 3rd of respondents didn’t plan to spend a single penny. Most intend to maximise the tax wrappers and allowances detailed beneath to make sure their cash goes so far as doable.

Nonetheless, rising inflation and rates of interest weigh closely on readers’ minds. Loads are shifting their funding technique and the rising price of borrowing has satisfied 13 per cent of readers to repay a bit of their mortgage.

Others are taking a special strategy to handle inflation, with 11 per cent of readers saying they may spend the vast majority of their bonus this 12 months.

“If that’s the case, halve what you suppose you’re going to get in your thoughts,” Currie advises, noting that tax and nationwide insurance coverage will swallow practically half of what excessive earners will take residence in money — extra in the event that they’re nonetheless repaying pupil loans.

Spending on residence enhancements was the highest reply for readers, carefully adopted by shopping for a property or buying and selling up. The following hottest reply was blowing some money on a overseas vacation as Covid journey restrictions finish.

One reader justified this choice as “investing in reminiscence creation” however one other was extra trustworthy: “I’ve labored my arse off incomes my bonus this 12 months, so I’m going to get pleasure from it. Life’s too quick!”

Whether or not you propose to spend, save or make investments any bonus cash coming your manner, the insights beneath from readers and specialists will provide help to profit from the cash.

Defending your bonus from tax

There are many tax benefits for many who select to take a position their bonus, however staying on prime of various guidelines will be taxing.

Earnings tax

In case your bonus is more likely to push your complete pay over the £100,000 mark for the primary time, remember this might set off a future tax invoice — even in case you are a salaried worker. That is as a result of gradual withdrawal of the £12,570 private allowance, which ends up in a 60 per cent marginal fee of tax on earnings between £100,000 and £125,140.

Any further prices gained’t essentially be collected by way of the PAYE system (for this reason HM Income & Customs requires everybody incomes over £100,000 to finish an annual tax return).

In case your employer provides “wage sacrifice” preparations, you might keep away from the effort of tax returns (and tax prices) by paying extra into the corporate pension scheme, taking your wage beneath £100,000. These schemes are well-liked with employers, as in addition they provide substantial nationwide insurance coverage financial savings — much more so when NI charges rise in April.

It’s also possible to use tax reduction on private pensions (Sipps) to navigate the 60 per cent fee, however you gained’t get the NI financial savings and might want to declare again increased fee reduction by way of your tax return.

The identical ways can be utilized by these incomes greater than £150,000, at which level the 45 per cent further fee of earnings tax applies.

Pensions

The perfect protecting “tax wrapper” for bonus money, particularly in case your employer matches contributions, 23 per cent of readers say they plan to profit from this — although tax limits are a rising difficulty.

Many corporations provide staff the choice of investing all or a part of their bonus instantly into their pension — as much as a restrict. Most individuals have an annual allowance of £40,000 (the mixture of worker and employer contributions).

“Those that have maxed out their annual allowance ought to act quick and see if they will use the ‘carry ahead’ guidelines to make use of up any remaining allowance from the 2018-19 tax 12 months,” says Nimesh Shah, chief government of Blick Rothenburg, the accountancy agency.

Carry ahead guidelines apply to the three previous tax years, so that you’ve solely bought till April 5 to make use of up any headroom from 2018-19 — or lose it perpetually. “In the event you haven’t bought your bonus but, however realize it’s coming, you might shove in money financial savings now and replenish them later,” is Shah’s tip.

These guidelines are particularly pertinent to very excessive earners. As a rule of thumb, when your complete earnings exceed £200,000 you might be probably in scope of the pensions taper, which whittles down your annual allowance from £40,000 to as little as £4,000.

Being “capped out” of creating additional pension financial savings was the second greatest issue influencing readers’ bonus funding choices, in line with our ballot.

Even youthful readers are aware of hitting the frozen £1.073mn lifetime allowance in future years, so had been prioritising different types of funding. “As a 38-year-old, I have already got £450,000 compounding away in my pension, so it’s silly to save lots of rather more,” stated one.

“Don’t overlook you could additionally arrange stakeholder pensions to your partner and youngsters,” says Shah. Non-earners who don’t pay tax can have as much as £2,880 per 12 months invested on their behalf. Topped up with £720 of tax reduction, that is instantly boosted to £3,600.

Isas

Tax effectivity, versatile withdrawals and a £20,000 annual allowance made shares and shares Isas the primary funding selection, with 54 per cent of readers saying this was the vacation spot for a few of their bonus.

As soon as contained in the Isa wrapper funds are sheltered from capital positive aspects tax and dividend tax and future withdrawals are exempt from earnings tax.

In written responses, loads of readers stated they’d replenish their partner’s £20,000 Isa allowance after utilizing their very own. As much as £9,000 per 12 months will be saved into Junior Isas (Jisas) for the underneath 18s. A tax loophole means £20,000 can moreover be saved right into a money Isa for youngsters aged 16-17 and transferred to an grownup shares and shares Isa once they flip 18.

Lastly, readers underneath 40 — or whose youngsters are aged over 18 — might additionally benefit from the Lifetime Isa. As much as £4,000 of your Isa allowance will be paid right into a Lisa, attracting a 25 per cent bonus. However the advanced guidelines is not going to swimsuit everybody — the cash needs to be used for a property buy or withdrawn after the age of 60.

Basic funding account

After exhausting the tax limits on pensions and Isas, bonus cash will be deployed right into a normal funding account (GIA) — one thing that one-third of respondents stated they supposed to do.

Not like an Isa, investments in GIAs are liable to capital positive aspects and dividend taxes in future — however don’t overlook your tax-free annual allowances (£12,300 for CGT and £2,000 for dividends).

These limits are per individual, so you might make investments in your partner or civil associate’s identify to make use of up their tax allowances.

Shah urges purchasers to “do the easy stuff first” earlier than taking a look at riskier tax-efficient investments similar to Enterprise Capital Trusts and Enterprise Funding Schemes, which 7 per cent of readers stated they had been contemplating. “Be sure to actually think about the funding case — the tax reduction ought to simply be a bonus.”

This message shouldn’t be misplaced on FT readers. “I’ll fill my Isa, and put the remaining in my GIA as I’ve beforehand invested in adequate VCTs for my threat urge for food,” one commented.

Even so, 7 per cent of readers had been glad to threat placing a part of their bonus into unregulated cryptocurrencies.

Defending your bonus from inflation

Inflation was the primary issue influencing readers’ bonus selections this 12 months, cited by multiple in 10 respondents.

For a lot of, excessive inflation is a driver to take a position extra or change their funding technique, though others used it to justify their choice to spend cash now.

Aware of risky markets and excessive valuations, some readers stated they’d lock within the tax advantages of placing bonus cash of their Isa or Sipp, however use the “money park” facility till they had been prepared to take a position.

“I’m ready for markets to tank, and can then purchase blue-chips and wise funding trusts,” stated one. “A possible dip in inventory markets is an efficient alternative for increase long-term holdings,” reasoned one other.

Quite than attempt to time the market, different readers stated they had been shifting technique by shifting away from progress shares and focusing on shares with dividend earnings.

Interactive Investor, the retail funds platform, has seen dividend payers Unilever and Shell prime its most-bought shares in January, whereas growing numbers of consumers are deciding on Capital Gearing and Private Property, two funding trusts targeted on wealth preservation.

Different buyers are eschewing bonds as they search market-beating returns and a few FT readers hope that investing in dangerous however high-growth UK companies by way of Enterprise Capital Trusts and Enterprise Funding Schemes will enhance their returns, with these routes favoured by 7 per cent of respondents.

Laith Khalaf, head of funding evaluation at AJ Bell, says buyers are focusing on shares in sectors which might be sources of inflation, particularly power and commodities, in addition to luxurious items. He predicts manufacturers with “pricing energy” like Burberry might prosper in an inflationary surroundings by passing on rising prices to customers — these flush with bonus money are unlikely to complain.

“The underside line is, there’s not rather a lot you are able to do about inflation, rates of interest, or market volatility, however through the use of tax shelters shrewdly, you’ll be able to a minimum of grasp on to extra of your earnings relatively than paying them over to the taxman,” he provides.

Shifting and enhancing

Property plans had been a driving drive for readers who stated they supposed to save lots of or spend most of their bonus cash — although many thought of sinking money into their residence to be an funding (of kinds).

Practically one in 5 (19 per cent) stated they had been allocating a few of their bonus in direction of residence enhancements, with some readers citing the challenges of hybrid working as the explanation for this.

“My wife desires an extension, so we’re getting an extension,” one wrote. “I’ll benefit from the enhancements now, and they’re going to improve my residence’s saleability in 5 years or so,” stated one other.

In second place was utilizing the bonus to assist purchase a property, or commerce up, chosen by 16 per cent. “I wish to purchase my first property earlier than rates of interest rise additional,” one reader confessed.

“Excessive stamp obligation means it’s higher to enhance than transfer,” was one other opinion shared by loads of different readers.

Paying down debt

Some 13 per cent of readers stated that utilizing their bonus to cut back money owed was their major goal, with the overwhelming majority specializing in their mortgages forward of anticipated rate of interest rises.

“I wish to be in the absolute best scenario after I remortgage in 15 months,” stated one. One other reader with a big mortgage stated they craved “the assured returns that paying down debt will present”.

“We’re already seeing purchasers trying to make use of bonus funds to cut back their mortgages or get hold of a greater remortgage deal,” says Andrew Montlake, managing director of mortgage dealer Coreco.

“Many search to benefit from the usual 10 per cent reimbursement with out penalty clauses that exist on most mounted fee mortgages. This has a twin impact of decreasing their month-to-month funds now, but in addition making certain that when the time involves remortgage, they’re able to get hold of a decrease fee as they may fall right into a decrease loan-to-value banding.”

For instance, Montlake says if a purchaser buying a £600,000 property was in a position to make use of their bonus to spice up a £100,000 deposit to £150,000, they’d have the ability to slash the most effective out there mortgage curiosity from 1.84 to 1.59 per cent on a five-year repair.

This would scale back their month-to-month funds by £262, saving them £15,720 over the preliminary five-year interval.

Extra cautious readers stated they supposed to save lots of bonus money for future expenditure, with faculty charges scraping into the highest 10 of causes cited.

“Having faculty charges to pay within the coming years means I can’t threat conserving the cash in something aside from my offset mortgage financial savings account,” stated one reader — a way a number of readers championed.

Some non-public faculties provide the power for fogeys to pay up entrance, often called “advance funding”. “That is price exploring because it might defend you from hefty inflation on non-public faculty charges sooner or later,” says Catherine Morgan, monetary coach and founding father of The Cash Panel.

Some faculties construction this as an funding scheme, as their charitable standing permits them to make tax-free returns on investments, which will be handed on to folks within the type of a reduction.

Giving to charity

Regardless of the inflated measurement of this 12 months’s pay outs, solely 39 per cent of readers stated they supposed to donate to charity.

These with philanthropic intentions can use Present Help to spice up their charitable donations, in addition to claiming tax reduction — one other manner that readers incomes over £100,000 might handle the 60 per cent tax lure, says Shah.

“It’s price figuring out you could make donations after the top of the tax 12 months, and carry the reduction again to the earlier tax 12 months, up till the purpose that you simply file your tax return,” he says.