How high earners could reduce childcare costs and increase their pension by thousands

Salary sacrifice can help you save money on childcare expenses and increase your pension by thousands

We look at the figures.

With salary sacrifice, you exchange a portion of your take-home pay for a non-cash benefit in a tax-efficient arrangement. It could be anything from a company car to a pension contribution.

Both you and your employer can gain from the arrangement since it lowers both your income tax and National Insurance (NI) bills.

Everyone would prefer to have a higher take-home pay, but if you can afford it, it's usually a good idea to increase your pension contributions.

By contributing 10,000 of their salary to their pension, an individual making £110,000 could save 6,200 in taxes (income tax and national insurance combined), according to analysis from the investment platform Interactive Investor.

It also wouldn't feel like a 10,000 income bump. This amount is sacrificed before taxes are subtracted, so the annual difference in your take-home pay would only be £3,800.

This is because, according to data entered into the government's PAYE calculator, a salary of £110,000 is worth £72,361 after taxes. In contrast, a salary of £100,000 is only worth £3,800 less, or 68,561.

Because you lose some of your tax-free personal allowance once your salary surpasses the £100,000 threshold, salary sacrifice plans can be especially beneficial for higher earners.

There are other possible savings besides taxes. Parents begin to lose important childcare benefits once their pay reaches this level, as noted by Myron Jobson, senior personal finance analyst at Interactive Investor.

Starting at age nine months, parents are eligible for 15 hours of free childcare per week; after the child turns three, this amount rises to 30 hours. However, as soon as your partner's or your own salary reaches £100,000, you forfeit this benefit.

"It can be a wise decision for a parent who makes slightly more than £100,000 to contribute a portion of their salary to their pension," Jobson stated.

In addition to lowering their income tax and national insurance bill, it can also, and this is very important, lower their adjusted income below the threshold, protecting important childcare benefits. Lower taxes, a healthier pension fund, and ongoing childcare benefits make that a win-win situation.

You may be able to maintain your Child Benefit by making a salary sacrifice.

Salary sacrifice also benefits median earners. It could assist you in maintaining important benefits like Child Benefit.

You may be eligible for this payment if you are in charge of raising a child under the age of sixteen (or under twenty but still enrolled in authorized education or training). Your oldest child's weekly Child Benefit is worth 26 points, and each additional child's weekly benefit is worth 17 points.

After your individual, not joint, salary surpasses £60,000, you or your partner begin to lose this benefit. For every £200 over the threshold in income, you repay 1% of the Child Benefit. When your salary reaches £80,000, you will therefore lose the entire amount. We refer to this as the High Income Child Benefit Bill. It is paid by submitting a tax return.

Once more, some parents might be able to avoid the charge by sacrificing their salaries. Normally, the High Income Child Benefit Charge would require a parent with two children earning 65,000 to repay 562. The charge could be eliminated if they gave up £5,000 of their pay.

According to Interactive Investors' analysis, the salary sacrifice arrangement would also result in a 2,100 reduction in income tax and national insurance for the employee in question. At the same time, the funds that were "sacrificed" into their pension pot would increase it by £5,000.

The employee would not fully experience the consequences of this 5,000 decrease in their take-home pay, just like in the last example. This is due to the fact that, after taxes, a salary of £65,000 is worth 48,261. A 60,000 salary, on the other hand, is worth 45,361 after taxes, which represents a 2,900 difference over the course of the year.

Is it appropriate for everyone to sacrifice their salary?

For some people, salary sacrifice is not the best course of action. Although it results in significant tax savings, you might not be able to afford to forgo your current income if your salary is already stretched.

"Achieving the correct balance between saving for the future and affording life today is crucial for many people, particularly those with growing household expenses, mortgage obligations, or other expenses," Jobson says.

It is also worthwhile to consider your more general financial objectives. For instance, salary sacrifice agreements may make your pay seem lower than it actually is from the lender's point of view if you are about to buy a home. This could make you eligible for a smaller mortgage.

Additionally, even in an emergency, you won't be able to access your pension funds until you turn 55. Because of this, it is wise to prioritize your emergency savings account before thinking about sacrificing your salary, especially if you do not yet have enough to cover three to six months' worth of necessities.

Will wage sacrifice be changed by the government?

The bad news for those who support this tax-saving measure is that, as the 2025 Autumn Budget draws near, chancellor Rachel Reeves may target salary sacrifice. However, at this point, any discussion is merely conjecture, fueled by a recent HMRC report.

Investigating the potential consequences of altering the regulations, the report was commissioned by the previous administration and released in May of last year.

According to Gary Smith, financial planning partner at wealth manager Evelyn Partners, "given the pressures on the public purse, it would be surprising if no one in government was looking at this report," as salary sacrifice has previously been highlighted as a possible way to strengthen the tax take.

Salary sacrifice is a very effective and efficient way for employees to save for their pensions, and it seems inevitable that reducing or eliminating it would have an impact on pension saving. This is because more government intervention would undermine trust in the pension system in addition to diluting the tax incentive.

Smith points out that after Reeves increased employer NI contributions in the 2024 Autumn Budget, employers found salary sacrifice to be more alluring. This is due to the fact that salary sacrifice plans enable businesses to lower their NI bill in addition to saving employees tax.