Bonus Season – How to determine what to do with the money?

With the UK tax year end approaching, bonus season for UK firms is upon us. For many individuals the size of an individual bonus will vary from year to year depending on various metrics and parameters. But, even though the size might vary, for many this is a lump sum of money that is often used and allocated to help meet various savings goals.

When in receipt of a lump sum, whether it be from a bonus, inheritance, gift, or something else, it can be an important time to revisit your individual wealth plan and determine where best to allocate the savings. With such a high cost of living in London, there are many people who rely on at least a portion of their annual bonus to be allocated to meet a savings goal. Three questions to consider during bonus season are as follows:

• Have you met your assumed annual saving target for meeting your goals?

If annual savings targets have been met, this provides a bit more flexibility in how these funds are used. One could use the funds to help pre-fund a future years savings targets or could use the opportunity to spend additional funds on a purchase that is categorised as a ‘nice to have’ versus a ‘must have’. Taking stock of where savings targets are versus where you planned them to be can be a sensible strategy before spending all of the money on a new purchase.

• Is there money that should be set aside to meet upcoming tax liabilities?

It is possible that taxes withheld on any bonus payment will need to be supplemented to meet overall tax liabilities for the year. Or, perhaps you had other sources of taxable income realised during the year with no withholding at source. Bonus time can be a good opportunity to carve out funds and set them aside to pay an upcoming and known cash outflow.

• Have you maximised your pension contributions?

With UK annual allowance thresholds set to be tapered for Additional Rate taxpayers starting in April 2016, now can be good time to determine whether you have utilised your carry forward and current year allowances that are available to you. This can be a good way to use your excess foreign tax credits that are often carried forward from year to year on your US tax return (for a period of up to 10 years).

Undergoing a review of your financial life, especially around bonus time will allow you to maintain a clear picture of where you stand financially. It is an opportunity to ensure you are still on track to meet your goals and help identify areas in need of adjustment.

For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.

Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.

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