The tax saving strategy also helps employers reduce their national insurance (NI) bills.
However, its analysis comes amid reports that HMRC is reviewing such salary sacrifice schemes, potentially tightening rules around what remains a popular and highly tax-efficient savings strategy.
A parent earning £110,000 who chose to salary sacrifice £10,000 would reduce their taxable income to £100,000 – just below the threshold where the £12,570 personal allowance begins to taper away.
But by taking a £10,000 cut, people could save £6,200 in tax and NI.
Effectively, in this scenario, they are trading £3,800 of after-tax spendable income for £10,000 in their pension – a tax efficiency of 62 per cent.
Those who earn less could still benefit from salary sacrifice and boosting their pension pot.
“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.
Preserving child benefit at £65,000
The calculations also demonstrate the power of salary sacrifice at lower income levels, particularly in protecting families from the controversial high income child benefit charge (HICBC).
The policy has been heavily criticised for its reliance on individual income rather than household income, as it means that a single parent earning over the threshold can lose all of their child benefit.
A parent of two earning £65,000 who sacrifices £5,000 of their salary would bring their income just below the £60,000 threshold at which the HICBC kicks in.
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Effectively, they are trading £2,338 of spendable income, including the HICBC, for £5,000 into their pension – an efficiency of almost 47 per cent. Employers in this case would save £750 in NI contributions.
The UK’s complex tax system features several “cliff edges” that can result in effective marginal tax rates far higher than headline rates.
Salary sacrifice can help mitigate this by reducing adjusted net income, which is used to determine eligibility for the personal allowance, child benefit, and childcare schemes.
Employer contributions are also exempt from NI, delivering additional savings for businesses.
A valuable but inaccessible benefit
While the benefits are clear, financial experts warn that salary sacrifice isn’t suitable for everyone.
“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.
With HMRC currently reviewing salary sacrifice schemes, there is also growing concern that rules could be tightened.
Some fear future restrictions may limit access to pension-based salary sacrifice or reduce its tax advantages.
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