As we approach the tax-year end, we are right in the middle of bonus season. Clients up and down the country will be getting rewarded for their hard work during the last year, one that was very much a busy one for many as we continued to live through the pandemic and begin the economic recovery.
Clearly some clients will receive a larger bonus than others. Those working in the City will be buoyed by bumper payouts following a successful 2021.
According to The Guardian, this year saw bankers at the big four companies – HSBC, Barclays, Lloyds Banking Group and NatWest – collect their biggest bonuses since the financial crisis in 2008, with total payouts to staff reaching more than £4bn.
Now we are not all so lucky to be receiving bonuses of this level, but nonetheless we will be seeing rewards for clients that will ultimately provide them with some challenges to their finances. While a bonus is always welcome, it can bring headaches that may not always be apparent when that increased pay slip comes through.
For advisers, this is where they can really provide value to a client.
While they may not want to reveal what their bonus is, it is important for advisers to have open and honest conversations with clients so that they feel comfortable to do so.
It can be a highly charged area, so removing judgements and providing that holistic financial advice so their plans do not get unnecessarily derailed will help bring about trust with clients, as well as a deeper understanding of their objectives and personal finances – making your recommendations even better informed.
For clients, there may also be a lack of understanding on what exactly a bonus could do to their financial situation. There is much to consider before a penny is even spent or put away, such as the impact on your tax bands, annual allowances and benefit entitlements.
This article will look to explore some of these challenges, as well as how to help a client work out what to do with the money.
Moving up and down the tax bands
The most immediate thing that can happen when a client receives a bonus is the fact it can quickly change the tax band they fall into.
If the bonus pushes their income above £50,270 a year, then they become a higher rate taxpayer, if they are entitled to the standard personal allowance of £12,570.
Should it push their income above £150,000 then this will tip them over into the additional rate tax band and mean they are paying 45 per cent on any income above this level.
This can mean their bonus is not quite as attractive as it might have seemed originally and they should be made aware they will not receive the full amount.
The client will also be paying national insurance and pension contributions on top of this, so it can quickly dwindle and not be quite as impactful as they first thought.
Now moving into the higher tax bands does come with some advantages – such as being able to claim additional tax relief on any pension contributions from income where higher and additional rates of tax have been paid.