How high earners could boost their pension by thousands and cut childcare costs
Salary sacrifice is a tax-efficient arrangement where you trade a slice of your take-home pay for a non-cash benefit. It could be anything from a pension contribution to a company car.
The arrangement can benefit both you and your employer, because it cuts your income tax bill and both of your National Insurance (NI) bills.
Nobody likes having less take-home pay, but paying more money into your pension is almost always a good idea, if you can afford to increase your contributions.
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Analysis from investment platform Interactive Investor shows someone earning £110,000 could save £6,200 in tax (income tax and National Insurance combined) by sacrificing £10,000 of their salary into their pension.
It wouldn’t feel like a £10,000 income hit either. As this sum is sacrificed before tax is deducted, the difference to your take-home pay would only be £3,800 per year.
This is because a £110,000 salary is worth £72,361 after tax is deducted, based on figures plugged into the government’s PAYE calculator. Meanwhile, a £100,000 salary is worth £68,561 – only £3,800 less.
Salary sacrifice arrangements can be particularly valuable for higher earners, because you start to lose part of your tax-free personal allowance once your salary crosses the £100,000 threshold.
The potential savings aren’t limited to tax either. As Myron Jobson, senior personal finance analyst at Interactive Investor points out, parents start losing valuable childcare perks once their salary hits this level.
Parents are currently entitled to 15 hours of free childcare per week once their child is nine months old, increasing to 30 hours once they turn three. However, you lose this allowance once you or your partner’s salary hits £100,000.
“For a parent earning just over the £100,000 tax cliff edge, sacrificing part of their salary into their pension can be a smart move,” Jobson said.
“It not only reduces their income tax and NI bill but, crucially, can bring their adjusted income below the threshold to preserve valuable childcare perks. That’s a win on several fronts: lower tax, a healthier pension pot, and continued childcare benefits.”
Salary sacrifice could help you keep your Child Benefit
Median earners can benefit from salary sacrifice too. It could help you hang onto valuable perks like Child Benefit.
If you are responsible for bringing up a child who is under 16 (or under 20 but still in approved education or training), you could be entitled to this payment. Child Benefit is worth £26.05 per week for your eldest child, and £17.25 per week for each additional child.
You start to lose this benefit once either you or your partner’s salary exceeds £60,000 – individually, not jointly. You pay back 1% of the Child Benefit for every £200 of income you earn over the threshold. This means you lose the entire sum once your salary hits £80,000. This is called the High Income Child Benefit Charge. You pay it by filing a tax return.
Again, salary sacrifice could help some parents avoid the charge. A parent with two children earning £65,000 would ordinarily have to pay back £562 through the High Income Child Benefit Charge. By sacrificing £5,000 of their salary, they could reduce the charge to zero.
The worker in question would also save £2,100 in income tax and National Insurance as a result of the salary sacrifice arrangement, according to Interactive Investor’s analysis. At the same time, their pension pot would receive a £5,000 boost thanks to the money that was “sacrificed” into the pot.
As with the previous example, the worker would not feel the full effects of this £5,000 drop in their take-home pay. This is because a £65,000 salary is worth £48,261 after tax. Meanwhile, a £60,000 salary is worth £45,361 after tax – a £2,900 difference over the year.
Is salary sacrifice right for everyone?
Salary sacrifice won’t be the right option for everyone. It creates valuable tax savings, but if your salary is already stretched, you might not be able to afford to sacrifice current income.
“For many, especially those with rising household costs, mortgage commitments or other expenses, striking the right balance between saving for tomorrow and affording life today is key,” Jobson says.
It is also worth thinking about your broader financial goals. For example, if you are on the brink of purchasing a house, salary sacrifice arrangements could make your salary appear lower than it actually is from the lender’s perspective. You might qualify for a smaller mortgage as a result.
Also remember that you won’t be able to access your pension savings until you turn 55, even in a financial emergency. As such, it is worth focusing on your emergency savings pot before considering salary sacrifice, particularly if you don’t yet have enough to cover three-to-six months of essential spending.
Will the government reform salary sacrifice?
The bad news for those who like this tax-saving policy is that chancellor Rachel Reeves could set her sights on salary sacrifice as we approach the 2025 Autumn Budget – although any chatter is only speculation at this stage, fuelled by a recent HMRC report.
The report, commissioned by the previous government and published in May last year, delves into the possible outcome of changing the rules.
“It’s not the first time that salary sacrifice has come under the spotlight as a potential area for shoring up the tax take, and given the pressures on the public purse, it would be surprising if no one in government was looking at this report,” said Gary Smith, financial planning partner at wealth manager Evelyn Partners.
“Salary sacrifice is a very efficient and effective way for employees to save into pensions, and it seems inevitable that watering it down – or dismantling it altogether – would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more government interference.”
Smith points out that salary sacrifice became more attractive to employers after Reeves hiked employer NI contributions in the 2024 Autumn Budget. This is because, as well as saving employees tax, salary sacrifice arrangements allow businesses to reduce their NI bill.
