How to unlock thousands in tax savings with ‘incredibly effective’ pension hack | Personal Finance | Finance
Parents could save thousands of pounds on tax and childcare costs by using salary sacrifice, according to new calculations from interactive investor. Salary sacrifice is a scheme that lets employees swap part of their salary for extra pension contributions or other benefits, taken from their pay before tax and National Insurance are calculated.
This means you pay less tax, your pension grows faster, and you may even keep access to valuable childcare perks. Interactive investor’s latest figures show just how much parents stand to gain. For example, a parent earning £110,000 who sacrifices £10,000 of salary could cut their tax bill by £6,200, boost their pension by £10,000, and still qualify for up to £10,000 in childcare support. In this case, they give up just £3,800 of spendable income to unlock these benefits.
A parent earning £65,000 who sacrifices £5,000 could save £2,662 in tax and child benefit charges, turning £2,338 of after-tax income into a £5,000 pension contribution.
Employers benefit too, saving up to £1,500 in National Insurance contributions for each high-earning parent who chooses salary sacrifice.
Interactive investor’s calculations highlight that for those just above the £100,000 threshold, the effective tax rate on extra income can soar to 67.5% as the personal allowance is withdrawn. Salary sacrifice offers a powerful, legal way to sidestep this tax trap and keep more money for the family.
Myron Jobson, senior personal finance analyst at interactive investor, said: “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 some valuable support. It is also a win for employers, enabling them to reduce their NI tax burden.”
He added: “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. 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.”
Child benefit is effectively withdrawn at a rate of 1% for each £200 earned over £60,000 a year by the higher-income partner, until it is fully withdrawn where the adjusted net income of the higher-income partner reaches £80,000 a year.
Mr Jobson said this means the scheme offers a win on several fronts, “lower tax, a healthier pension pot, and continued childcare benefits.”
However, Britons are warned that salary-sacrificed income won’t be accessible until retirement, making it key to consider budgets before making any moves.
Mr Jobson continued: “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.
“Salary sacrifice should be used thoughtfully – as part of a broader plan that reflects both your current needs and future aspirations.”
