Will this bonus season see you maxing out your credit cards, or making the most of your tax-free allowances?
Well-paid professionals say they are feeling the pinch this year as less generous pay and bonus packages are eaten away by bigger mortgage repayments, higher taxes and rising living expenses.
Overall, 58 per cent of the 2,675 respondents in the FT’s annual bonus survey expect their 2024 payout to be lower or about the same as last year, reflecting the gloomy outlook as the financial sector cuts costs, and in many cases, jobs.
In the three years since our survey began, the proportion of readers who say they will use the bulk of their bonus to pay down mortgages or other debts has jumped by 64 per cent, with many citing redundancy fears as a factor in their decisions.
Investing a bonus is far more tax efficient. While half of readers still intend to make this their priority, since 2022, there has been a 15 per cent drop in the proportion saying this. However, many plan to increase their pension contributions to avoid the “£100,000 tax trap” of high marginal rates and the loss of childcare benefits.
“Despite consistent salary increases for me and my partner, our outgoings — especially our mortgage — have increased at a higher rate. We are poorer now than we were five years ago,” said one reader.
Smaller bonuses at banks have been driven by a sustained slump in dealmaking activity. A less competitive recruitment market also means employers are prepared to risk handing staff smaller bonuses, or even a doughnut — a bonus of zero.
While 42 per cent of readers expect their bonus to be higher than last year, many complain that their base salary has not risen, while day-to-day living costs have rocketed.
One FT reader wrote: “Childcare spending is my number one financial priority. We can’t afford a holiday this year, despite having a joint household income of £165,000.”
The increasing cost of servicing a mortgage was the biggest worry driving readers’ financial decisions, but growing numbers of high earners tell us that they are borrowing to sustain the lifestyle to which they have become accustomed.
Whether you expect to receive a bonus or not this year, the results of our 2024 survey offer valuable insights on how to manage your money in challenging times, as well as investing for the future in the most tax-efficient way.
The three Rs
The three Rs — remortgaging, redundancy fears and rebuilding cash buffers — are this year’s stand-out themes.
In their detailed responses about the reasons behind their cash allocation decisions, many readers spoke of the “guaranteed return on paying down debt”.
“Both myself and my husband work in the financial sector, and are acutely aware that our roles aren’t secure. We want to use our bonuses to pay off our mortgage when our fixed-rate ends,” one survey respondent said.
While paying your mortgage off early will save you interest, unlike many investments, it does not have the added benefit of tax relief.
Three cheers for the reader who told us she is sticking to the strategy of investing her bonus every year: “It’s the best way to gradually increase my wealth.”
However, many others confessed they found it a challenge to live off their salary alone. Instead of investing the bulk of their bonus, as has been the trend in past reader surveys, this cash is increasingly needed to meet day-to-day living costs.
As one reader put it: “I got a bonus, but have received no pay rise for the past two years. The increased cost of living is eating up my base salary and I’m no longer able to save.”
Rebuilding cash buffers is of increased priority, with 21 per cent of readers opting to keep their bonus cash in a savings account, up from 18 per cent in 2022.
When we asked these readers what specific goal they were saving towards, the biggest group (39 per cent) said they simply wanted to have more cash on hand to cope with whatever the year ahead might bring. One in four said they were saving to buy a property, and nearly one in five said they were saving to pay off a lump sum of their mortgage when their fixed-rate deal expired.
Doing this would have the added bonus of reducing monthly costs, notes Jason Hollands, managing director at Evelyn Partners, a wealth manager. “That could free up capacity to make regular monthly investments again going forward — the two are not mutually exclusive,” he says.
Saving to cover the cost of child-related expenses — particularly if the Labour party wins the election and adds value added tax to private school fees — was the fifth most popular reason for saving.
While the Bank of England bides its time cutting interest rates, it is possible to get more than 5 per cent in a savings account. However, quite a few readers told us they were investing their medium-term savings pot in short-dated gilts in the hope of getting a better return over a longer period. Capital gains on gilts are tax-free, unlike interest on cash savings outside of an Isa.
Investing less
Clearly, investing has become a luxury for some. But given the size of some of the bonuses paid, it is not surprising that the majority of FT readers surveyed still intend to invest at least some of their cash.
The biggest group of survey respondents work in banking and finance in the UK, but there were also detailed responses from professionals working in law, tech, energy and consulting.
“The data on the size of bonuses suggests employers are being more aggressive in how they allocate their bonus pools this year, indicating a greater focus on really rewarding those who they see as vital to retain,” Hollands says.
When we asked readers how they intended to invest their cash, once again, investing using stocks and shares Isas was the number one choice — though far fewer are in a position to take full advantage of the £20,000 annual Isa allowance. This year, only one-third said they would invest using Isas, compared with more than half of respondents to our 2023 survey.
Pensions moved from third place last year to 2024’s second most popular choice, thanks to the chancellor increasing the annual allowance from £40,000 to £60,000 (see below). But with more readers saying they want to keep more cash on hand, not everyone can afford to be this tax efficient and lock up their money inside a pension for the long term.
Adam Walkom, a financial planner and partner at Permanent Wealth Partners, has lots of clients who are City workers in their 30s and 40s. Many bought bigger houses and moved out of London in the “race for space” during the pandemic.
“When the interest rate on your million pound mortgage jumps to 5 per cent, that makes a big difference to your life,” he says. “For the last two years now, I’ve seen a real switch away from taking bonus money and investing for the future to people refocusing and saying, actually, I want to de-risk and take that mortgage down.”
Taxing times
Frozen thresholds mean increasingly punitive rates of personal taxation are another huge factor in bonus decisions — especially for readers north of the border.
Avoiding the £100,000 tax trap was the fourth most common reason cited by readers in their detailed answers. The tapering of the personal allowance results in a 62 per cent marginal tax rate — if national insurance is included — on the band of income between £100,000 and £125,140 as well as the loss of any state childcare entitlement.
Many readers told us they were using salary sacrifice to increase their pension contributions, and keep their income below this level.
The larger pensions annual allowance of £60,000 gives readers more scope to cut their tax bills and boost their retirement prospects. Although they will have to pay tax on pension withdrawals, money invested can grow tax free, and a quarter can be taken as a tax-free lump sum. Yet there were clear signs of dissatisfaction that this £100,000 threshold has remained frozen since 2009.
“My entire bonus is caught in 62 per cent marginal tax territory, so it’s not worth accessing it,” commented one reader, adding: “It’s not big enough to make a meaningful difference to my lifestyle or cash flow.”
Another reader put it more bluntly: “I’m fed up of working for the government.”
People in Scotland face an even tighter squeeze, with 45 per cent income tax rates kicking in at a much lower threshold of £75,000 — a difference dubbed the “Tartan Tax”. That rises to 48 per cent on income above £125,140.
One Scottish reader maxing out his pension says: “I’m planning to retire earlier as I’m getting more annoyed at the constant raising of taxes.” However, the strategy of pension stuffing to avoid bigger tax bills is not flexible if your circumstances change.
“Pensions are a fantastic wealth-building tool over the long term, but any money that goes into a pension, you can’t touch until you’re 55 or older,” warns Walkom. “The tax savings are great, but funnelling all of your bonus into a pension when, actually, you’re going to need that money for living is not the best idea.”
He advises readers to “take a step back” and think about short-term and long-term priorities. For those who fear redundancy, this could include building a bigger emergency savings pot. “Think strategically about the planning element first, and let that drive the investment strategy.”
Safety or glory?
One financial change that Labour has said it will not reverse if it wins power is the government’s decision last November to scrap the banker bonus cap. Over the years, the cap led to banks paying much higher salaries and smaller bonuses, reversing the traditional pattern — though this has given readers more financial security in tougher times. So has the removal of the bonus cap had an impact?
“Not yet” was the most popular answer of respondents working in UK banking — but in this transitional period, many felt changes were happening by stealth.
“My salary has been frozen for two years, and I’m expecting my bonus will form a greater part of my pay in future,” was one typical response.
Readers working for UK banks felt bosses were unlikely to risk cutting salaries for existing employees — but as base salaries plateau, higher inflation means their pay is going backwards in real terms.
Several said their employers had communicated that cap-related changes for the next bonus round will be announced in the summer. But few bankers are likely to welcome these changes.
When asked which scenario they preferred, unsurprisingly, four out of five FT readers voted for safety over glory, saying they would favour a high base salary and a limited bonus, as opposed to a low base salary and an unlimited bonus.
“We’ll only really know the answer when we get a stonking year for financial markets with lots of M&A and lots of IPOs,” says Hollands. “That’s when the relaxation of the banker bonus cap will show if the good times are well and truly back.”
Pensions make a comeback
For many years, higher earners faced tight restrictions on how much they could invest into pensions — but this year’s survey shows nearly one in four respondents who intend to invest their payout will “pension their bonus” to take advantage of valuable tax reliefs, up from one in five readers a year previously.
Since chancellor Jeremy Hunt increased the annual allowance in the Budget last year, it is possible to make up to £60,000 gross pension contributions and receive tax relief. For increasing numbers of readers whose bonus pushes them into the £100,000 “tax trap” or above £125,150, where 45 per cent income tax is applied, this is an attractive prospect.
“I’ve put everything over £100,000 into my pension and have utilised the last three years of tax allowances on top, using carry forward rules,” one reader told us, adding: “I fully expect the larger £60,000 pension allowance to disappear under Labour.”
One in four FT readers said that they would pay more into their pensions this tax year as a result of the enlarged annual allowance, and abolition of the lifetime allowance (LTA). However, 6 per cent of readers said that although they could afford to invest more into pensions, they were holding off through fear a future Labour government would reverse the LTA changes.
“Check with your employer to see if you can use salary sacrifice to invest your bonus into your pension,” says Nimesh Shah, chief executive of Blick Rothenberg. “This can give some additional relief for national insurance, and your employer may also share any employer’s national insurance savings with you in an additional contribution to your pension.”
However, he points out: “If you have adjusted income of more than £260,000, your annual allowance will be reduced and can be restricted to £10,000.”
At these income levels, Venture Capital Trusts and Enterprise Investment Schemes may appeal. They offer 30 per cent upfront tax relief (and further tax benefits down the line) for investing in early-stage companies. However, our survey shows that the numbers of FT readers planning on investing their bonuses into VCTs and EIS is the lowest since our survey began.
“I expect it will be a much quieter year for these more esoteric investments as higher earners now have more mainstream options,” adds Jason Hollands, managing director at Evelyn Partners. He also believes some of the pullback is due to risk aversion. “There’s still a potentially tough economic outlook for early-stage companies.”
