Bonus exchange salary sacrifice: UK employer guide

For many employees, a performance bonus can feel underwhelming once 42% or 47% Income Tax and National Insurance (NI) are deducted.

For employers, bonuses are also one of the most heavily taxed forms of reward – increasing both payroll costs and Employer NI liability.

So, is there a smarter middle ground that benefits both the business and its people?

This guide explains how bonus exchange works, outlines the 2025/26 tax implications, covers key compliance considerations, and explores how UK employers can implement it effectively as part of a modern reward strategy.

What is bonus exchange salary sacrifice?

Bonus exchange (or bonus sacrifice) is a type of salary sacrifice arrangement where an employee agrees to give up some or all of their bonus in return for an employer pension contribution of the same value.

Instead of receiving the bonus as taxable pay:

• The bonus is redirected into the employee’s pension
• Income Tax and Employee NI are not applied to the exchanged amount
• Employer NI is also not payable on the sacrificed portion

TIP It is fully optional and must be agreed before the bonus is paid.

How does bonus exchange work in practice?

A typical UK employer process looks like this:

1. The employer offers bonus exchange as part of its reward strategy
2. Employees choose whether to exchange some or all of their bonus
3. The sacrificed amount is redirected into their pension as an employer contribution
4. Tax and NI are calculated only on the reduced bonus amount
5. Payroll reflects reduced gross pay and a corresponding employer pension contribution

TIP Participation must be agreed in advance of payment and documented correctly for HMRC compliance.

What are the benefits of bonus exchange for employers?

A bonus exchange programme benefits employers in 3 main ways:

1. Employer National Insurance savings

As of the 2025/26 tax year, Employer National Insurance applies to cash bonuses, increasing the total cost to the business.

When a bonus is exchanged into a pension instead of being paid as cash, Employer NI is not payable on the sacrificed amount. This creates an immediate National Insurance saving for the employer.

Many organisations choose to reinvest some or all of this saving back into the employee’s pension, enhancing the overall reward without increasing the company’s cost.

2. Cost-neutral reward enhancement

Bonus exchange improves the perceived value of a bonus without increasing overall reward spend.

It allows employers to:

• Strengthen pension engagement
• Support long-term financial wellbeing
• Improve reward efficiency

3. Supports retention and financial wellbeing

Providing structured ways for employees to build long-term wealth strengthens overall financial resilience and supports better long-term decision-making. For employers, this creates stronger alignment between reward strategy and long-term outcomes:

• Improves retirement readiness without requiring higher ongoing employee contributions
• Encourages pension engagement at key earning moments, such as bonus cycles
• Transforms bonuses from short-term incentives into long-term value drivers
• Supports financial wellbeing strategy by linking reward to future security

What are the benefits of bonus exchange for employees?

A bonus exchange programme benefits employees in 3 main ways:

1. Potential tax and NI savings

Employees can generate up to 47% in savings. Because the exchanged amount is not treated as taxable income:

• No Income Tax is deducted on the sacrificed portion
• No Employee NI is deducted on that portion
• The full gross amount goes into the pension.

2. Higher pension contributions

Employees can boost their pension pot significantly without feeling the same reduction in take-home pay as they would from a standard pension contribution.

3. A structured way to meet long-term goals

Bonus exchange provides a deliberate mechanism to allocate windfalls toward retirement planning.

How does bonus exchange help high earning employees?

Bonus exchange can help high earning employees find financial relief in two ways:

1. Avoiding the 60% tax trap

Employees earning between £100,000 and £125,140 lose £1 of their Personal Allowance for every £2 earned above £100,000.

This creates an effective 60% Income Tax rate in that band.

Example:

• A £5,000 cash bonus may result in only ~£1,900 net after Tax and NI.
• Exchanging that £5,000 into a pension preserves the full value.
• It can also protect the £12,570 Personal Allowance from tapering.

TIP For employers with higher earners on their payroll, this is often the most compelling use case.

2. Protecting child benefits eligibility

For employees earning over £60,000, bonus exchange lowers Adjusted Net Income, helping families retain some or all their Child Benefit.

It can also preserve access to tax-free childcare, allowing parents to benefit from government support while simultaneously boosting their pension savings. This makes bonus exchange particularly valuable for dual-income households.

Is bonus exchange HMRC compliant?

Yes. Bonus salary exchange is a compliant government scheme – when structured correctly.

Key compliance requirements include:

• Agreement before bonus payment
• Contract variation to reflect salary sacrifice
• Proper payroll documentation
• Monitoring National Minimum Wage rules

Failure to follow proper structure can invalidate the arrangement. Click here for the top 5 things to look for in a salary sacrifice provider. 

Is bonus exchange affected by the 2029 NI cap?

Yes. From April 2029, a £2,000 annual limit on NI-free salary sacrifice will apply.

• Contributions above £2,000 will remain Income Tax-free
• However, they will attract National Insurance

Until April 2029, NI savings remain uncapped.

Does bonus exchange affect the Pension Annual Allowance?

Yes. Exchanged bonuses count toward the standard £60,000 Annual Allowance.

Higher earners should monitor:

• The Tapered Annual Allowance
• Total pension contributions (including employer contributions)

Exceeding allowance limits may trigger a tax charge.

How is bonus exchange recorded in payroll?

When implemented correctly:

• The employee’s gross pay is reduced by the sacrificed amount
• The employer makes a corresponding pension contribution
• Payslips reflect the adjusted gross pay
• Contract variations are documented and retained for HMRC

How can UK employers implement bonus exchange?

Employers can manage bonus exchange internally or work with a financial wellbeing provider.

Key implementation considerations:

• HMRC compliance
• National Minimum Wage checks
• Payroll integration
• Clear employee communication
• Eligibility checks
• Annual Allowance awareness

How Maji supports bonus exchange

At Maji, we help employers implement compliant, high-engagement salary sacrifice schemes with minimal admin burden.

Maji supports employers by:

• Providing a clear digital platform for employee engagement
• Helping employees understand the impact of salary sacrifice choices
• Supporting HR teams with simple, compliant administration
• Embedding bonus exchange within a wider financial wellbeing framework
• This ensures employees don’t just access benefits – they understand how to use them effectively.

Should your organisation offer bonus exchange?

Bonus exchange can be one of the most cost-effective reward enhancements available. Your organisation should consider offering a bonus exchange programme to employees if you match the requirements below:

• Pay discretionary or performance bonuses
• Employ higher earners
• Want to reduce Employer NI costs
• Want to improve pension engagement without increasing spend

Explore salary sacrifice options with Maji

Bonus exchange is just one part of a broader salary sacrifice and financial wellbeing strategy. 

Maji has one of the most extensive salary sacrifice offers in the UK. You can see them all here. 

If you’re interested in learning how these schemes can support your employee benefits strategy, get in contact with our team today. 

Think Money. Think Maji.

Last updated February 2026

What to read next