If you are expecting a pay rise or bonus and are worried it could tip you into a higher tax bracket, it may be worth discussing salary sacrifice with your employer.
The scheme allows you to set aside part of your salary for things like pensions.
That part of your salary is then removed before tax is paid, reducing how much of your income is subject to tax while boosting your retirement pot.
And if you’re near the £50,270 or £100,000 tax band thresholds, it could also effectively keep you in the lower band – meaning you don’t lose certain benefits.
That’s because eligibility for things like free childcare is based not on your actual salary, but on your adjusted net income – and salary sacrifice reduces that figure.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Salary sacrifice is a popular feature of many workplace schemes because it allows employees to exchange part of their salary or bonus for an equivalent pension contribution. This not only reduces income tax, but also lowers national insurance contributions [NICs], for both the employee and employer, making pension saving even more tax efficient.
“Of course, not every employer offers salary sacrifice, but if yours does, now may be an ideal time to increase contributions – assuming you can afford to. Salary sacrifice can be particularly beneficial for those nearing crucial tax cliff edges where an individual’s marginal rate can jump dramatically.”
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What are the thresholds and benefits that could be lost?
Employees approaching £50,270 may move into the 40% higher-rate band (in England, Wales and Northern Ireland).
Marriage allowance is only available where the recipient is a basic-rate taxpayer – so those above the threshold lose out.
Those nearing £100,000, meanwhile, face the gradual withdrawal of their personal allowance, creating an effective 62% marginal rate for earnings between £100,000 and £125,140 (again, tax bands differ in Scotland).
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Rather than pay that effective rate, some Britons favour putting earnings over £100,000 into their pension via salary sacrifice.
As an illustration, you might earn £109,999 and put £10,000 into salary sacrifice, reducing your adjusted net income to £99,999.
For some Britons, a bigger incentive to use salary sacrifice is to keep childcare benefits.
Eligibility for Tax-Free Childcare and 30 hours of free childcare is lost if adjusted net income exceeds £100,000.
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What are the downsides?
Because salary sacrifice lowers your official salary, it can affect how lenders assess your income when you apply for borrowing, such as a mortgage.
Certain workplace benefits – including life insurance, holiday pay, sick pay and maternity pay – may also be calculated using your contractual salary and could therefore be reduced.
Before proceeding, it is sensible to ask for a tailored breakdown showing how the arrangement would change your take-home pay, pension funding and employment benefits.
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The bad news
In the autumn budget, the government announced plans to cap the amount of salary employees can sacrifice into a workplace pension at £2,000.
This was widely seen as a setback for pension savers.
However, the cap will not take effect until April 2029, giving workers just over three years to take full advantage of the current, more generous tax treatment before the rules tighten.
