Parents under financial strain could save thousands of pounds and significantly enhance their pension pot by utilising a lesser-known tax strategy currently being examined by HMRC.
New data from an investment platform called “Interactive Investor” illustrates how salary sacrifice schemes are enabling families to avoid hefty tax penalties, retain crucial childcare benefits, and even provide advantages for their employers – all while saving for retirement.
However, this popular loophole, which allows employees to exchange a portion of their salary for pension contributions, may soon be tightened as the taxman reviews the regulations.
Under this scheme, workers forfeit part of their wages, thereby reducing their taxable income – and their National Insurance bill. Employers can also make savings on NI, while the employee’s pension grows more rapidly, free from immediate taxation.
For some families, the figures are astounding. Consider a parent earning £65,000 with two children. By sacrificing £5,000 of salary, they not only reduce their income tax and NI bill by £2,100 – they also dodge the dreaded High Income Child Benefit Charge (HICBC), worth up to £562. This equates to a total saving of £2,662.
The child benefit charge comes into effect once one parent earns over £60,000, gradually disappearing completely by £80,000. Parents lose £1 in benefit for every £2 earned above the threshold. In this scenario, the parent exchanges £2,338 of after-tax spending money for a £5,000 pension contribution – a tax efficiency of nearly 47%.
Myron Jobson, senior personal finance analyst at interactive investor, commented: “Salary sacrifice can be an incredibly effective tool for those looking to boost their retirement savings while dodging sharp tax cliff edges which could see parents miss out on valuable support.”
The tax benefits become even more attractive for higher earners. A parent earning £110,000 could sacrifice £10,000 of their salary to slip below the £100,000 tax “cliff edge” – where the personal tax-free allowance starts to diminish.
They’d save a staggering £6,200 in tax, and their employer would gain £1,500 in NI savings. More importantly for families with young children, this could mean retaining 15 or even 30 hours of free childcare – worth up to £7,500 per child – and Tax-Free Childcare worth another £2,000.
In total, a parent might forfeit £3,800 of after-tax income and end up with £10,000 in their pension – plus nearly £10,000 in childcare assistance.
Tax savings with salary sacrifice
|
Salary after salary sacrifice |
£65,000 |
£110,000 |
|
Pension contribution |
£5,000 |
£10,000 |
|
Income tax saving |
£2,000 |
£6,000 |
|
Employee NI saving |
£100 |
£200 |
|
High Income Child Benefit Charge saving |
£562 |
N/A |
|
Combined tax saving |
£2,100 |
£6,200 |
|
Combined saving (with HICBC) |
£2,662 |
|
|
Combined savings with £10k childcare benefit factored in |
£16,200 |
|
|
Employer NI saving |
£750 |
£1,500 |
“This isn’t just about saving tax,” says Mr Jobson. “It’s about preserving childcare support that could be a lifeline for working families.”
But he advises caution. “It’s important to remember that salary-sacrificed income isn’t accessible until retirement.”
He adds: “For many, especially those juggling mortgages or childcare bills now, it’s a question of balance.”
With HMRC now scrutinising salary sacrifice arrangements more closely, changes could be imminent – meaning parents might want to act sooner rather than later.
“Used wisely, it’s a win-win – for parents, for pensions, and for employers too,” Mr Jobson remarks. “But it has to be part of a wider plan. Retirement is important – but so is making life affordable today.”
