Parents earning between £65,000 and £110,000 are being encouraged to utilize a tax-saving method that could potentially save them up to £6,200. This strategy, known as salary sacrifice, allows individuals to reduce their income tax and National Insurance contributions while boosting their pension savings.
By exchanging part of their salary for pension contributions, families can effectively maintain vital child benefits and access significant tax efficiencies. According to GB News, this pension benefit is a practical option for many, especially given the possible impact of tax changes currently being reviewed by HM Revenue and Customs (HMRC).
How Salary Sacrifice Works for Tax Savings
Salary sacrifice allows employees to exchange parts of their salary, bonuses, or redundancy payments for pension contributions. This reduces both income tax and National Insurance payments. Employers benefit too, as they pay lower contributions.
Under the current regulations, parents earning £65,000 can contribute £5,000 to their pensions and avoid the High Income Child Benefit Charge, which kicks in for those earning above £60,000.
The Savings Potential: Avoiding Child Benefit Charges
For parents earning £65,000, contributing £5,000 via salary sacrifice can not only save them £2,100 in income tax and National Insurance but also help them avoid the £562 High Income Child Benefit Charge.
This approach effectively exchanges £2,338 of after-tax income for £5,000 in pension contributions, giving parents a tax efficiency of 47%. The total savings amount to £2,662.
Higher Earners Can Save Even More
Parents earning £110,000 can save up to £6,200 by sacrificing £10,000 of their salary. This helps avoid the personal allowance reduction, which occurs for those earning above £100,000.
Salary sacrifice allows them to reduce their income below the £100,000 threshold, maintaining access to 15 or 30 hours of free childcare worth up to £7,500 per child annually, in addition to Tax-Free Childcare benefits of up to £2,000.
The Employer’s Advantage
Employers also benefit from salary sacrifice. By contributing to employees’ pensions, employers can lower their National Insurance contributions.
For parents contributing to pensions, this is an added incentive to adopt salary sacrifice as part of their retirement planning. In total, employers save £750 in National Insurance contributions per parent using salary sacrifice.
The Hmrc Review and Expert Advice
Lately, HMRC (Revenue and Customs) has been reviewing salary sacrifice arrangements, which could lead to changes in the existing rules. Financial experts are advising parents to take advantage of salary sacrifice while the current rules are in place.
Myron Jobson, a senior personal finance analyst at interactive investor, has emphasized the benefits of salary sacrifice:
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 National Insurance tax burden.
However, Jobson also cautioned about the long-term nature of salary sacrifice:
Salary-sacrificed income remains inaccessible until retirement. 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.
