It’s bonus time again. For most of us that means little, but for 350,000 City employees the next few weeks will be a time of feverish anticipation and — for many — time to splash the significant sums of cash they have earned as their bonus for this year.

Organisers of the London Boat Show say that they expect buoyant city workers to spend more than £200 million on luxury yachts as they seek a mooring for their bonuses. Estate agents in Kensington, Chelsea and other upmarket areas of London are also predicting a bumper new year, as are wine merchants, Porsche dealers and plastic surgeons. Total bonuses are expected to top £20 billion and the Centre for Economics and Business Research estimates that 4,200 people will receive payouts of more than £1 million.

But while there is an extravagant streak to the City, many wiser bonus recipients will be thinking ahead. Justin Modray, of Bestinvest, the independent financial adviser (IFA), says: “Life in the City is often stressful, so it’s not uncommon for workers to make hay while the sun shines, with a view to taking it easy thereafter. To achieve this it is important to invest to provide an income later in life.”

An increasingly common and tax-efficient way for City high-flyers to invest bonuses is to buy agricultural land. The Royal Institute of Chartered Surveyors (RICS) says non-farmers have bought more than half of the farms sold in the South East this year.

Buying agricultural land is a tax-efficient strategy because owners of working farms can pass on the land to their descendants without paying inheritance tax.

Rupert Sweeting, a partner in the country department of Knight Frank, the estate agent, says: “We have already started receiving calls from City traders who are thinking of swapping their black brogues for green wellies. Estates that have acres of land and a pretty farmhouse are in particular demand. We are expecting a bumper year and it is sure to send agricultural land prices higher.”

But few of these urban, cash-rich investors will be found milking sheep at six in the morning. Mr Sweeting says: “Normally, the investor will strike a relationship with a local farmer or will employ a farm manager, farm labourers and have weekly meetings to ensure that everything is progressing smoothly.”

Julian Sayers, a spokesman for RICS, says that City workers who are contemplating a farm purchase need to be careful because the rules surrounding agricultural land tax relief are complex.

“It is likely that investors will have to prove that their operation is a working farm for it to be exempt from inheritance tax,” he says. “The tax relief applies only to agricultural operations. So if a farm has surplus buildings that are converted into office units or residential lets, they will not qualify.”

The percentage of tax relief can also vary, depending on the circumstances. Investors who buy a farm with a long-standing tenant will receive only 50 per cent tax relief. Also to qualify, the farmhouse must be involved in the working of the farm and be commensurate with the size of land holding. “If you buy a £2 million farmhouse with a five-acre paddock, you will not get inheritance tax relief on the building,” Mr Sayers says.

Investors looking for a less rural but more tax-efficient retreat for their money should put their bonus into a pension. Donna Bradshaw, of IFG Group, the financial services company, says: “Since the introduction of the new pension rules in April most individuals can make far higher annual contributions.”

Mr Modray advises high earners to use self-invested personal pensions (Sipps) to gain the best benefit from their pension plans. “Using a Sipp opens up a very wide investment universe,” he says.

Ms Bradshaw advises employees to ask their firms to pay some of their bonus directly into their pensions. “If people do this, they not only gain full tax relief on their pension contributions, but they also save on employer and employee national insurance (NI) contributions,” she says. “It pays to ask whether your employer will pay the employer NI contributions into your pension too.”

Ms Bradshaw says that an employee sacrificing £100,000 of bonus into his or her pension fund would end up with £112,800 invested in the pension, against receiving only £59,000 after tax deductions. However, she adds:

“Remember that the maximum contribution to your pension is £215,000 for this tax year, so be careful to deduct total pension contributions for the year before working out how much of your bonus you want to be put into your pension.”

High earners also need to bear in mind that their total pension savings over the course of their working lives should not exceed the lifetime allowance of £1.5 million. Pension savings in excess of that sum are taxed are 55 per cent.

Those who are already approaching that lifetime limit should think about using their additional income to clear any debts. “Paying off the mortgage is a very sensible choice for the risk-averse, as earning investment returns in excess of mortgage rates involves some risk,” Mr Modray says.

Another tax-efficient investment is venture capital trusts (VCTs). Mr Modray says: “You can invest up to £200,000 a year and benefit from a 30 per cent income tax rebate on monies invested — provided that the VCT is held for five years — as well as no tax on growth or income.”

However, he adds that VCTs can be risky because they invest in small companies.

For more investment articles visit www.timesonline.co.uk/invest

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained