Employees are missing out on tax relief on their bonuses because they are failing to put the money into their pension, instead choosing to spend it on treats, Aviva has said.
The provider found a mere 9% of people who received a cash bonus in the past opted to have part of it paid into their pension, a move known as ‘bonus exchange'.
Instead, 39% chose to spend it on a treat like shopping or a holiday. The provider had surveyed 2012 adults in February.
Aviva pointed out that by opting to take the bonus in their pay packet, employees are paying tax and national insurance on their bonuses.
This expense could be avoided by choosing bonus exchange, which would carry the additional benefit of increasing their pension saving while also benefiting from a government top up in the form of tax relief.
For instance, a basic rate taxpayer earning £27,000 per year who receives a one-off bonus of £2,000 would receive just £1426.70 if they decided to take the bonus as cash. However, they could get the full amount if opting for bonus exchange, Aviva said.
Lack of understanding
Aviva said the research indicated the reason so many people were failing to take advantage of this government top-up was a lack of understanding of how pensions work.
When asked to identify the differing tax implications of taking a bonus in their pay packet or putting it into a pension, fewer than a quarter of people (24%) knew the bonus would be taxed if taken as pay, but not taxed if it was put into a pension.
Aviva managing director of workplace benefits Colin Williams said: "We live in a world of instant gratification. We want something now, not later, and to some extent that is understandable. But it's clear that a large number of people are missing out because they don't understand how pensions work.
"Tax relief along with an employer pension contribution are the two biggest reasons to pay into a workplace pension. If people don't recognise the value of these then they are not able to make an informed choice when they are offered a bonus. This knowledge gap is creating a savings gap."
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