By Daniel Barrett, Chartered Financial Planner
As a financial planner, I often meet high achievers who are doing everything right – working hard, climbing the ladder, and earning a great salary – only to feel a sense of “tax fatigue” when they see their monthly payslip.
Take “Abbie,” for example. Abbie is a Senior Executive at a pharmaceutical company earning a substantial six-figure salary. She is at the top of her game, but with roughly 10 years to go until she hopes to retire, she was concerned that things weren’t set up as efficiently as they could have been and that her money wasn’t working as hard as it could be.
The £100,000 Tax Trap (and why it matters)
When your earnings reach a certain level in the UK, something frustrating happens: you start to lose your £12,570 tax-free Personal Allowance. For every £2 you earn over £100,000, you lose £1 of that allowance.
In Abbie’s case, the level of her earnings meant her Personal Allowance was almost entirely tapered away. Effectively, the income she earned in that “trap zone” between £100,000 and £125,140 was being taxed at an eye-watering effective rate of 60% (40% Income Tax plus the loss of the allowance).
What Is Pension Salary Sacrifice?
Abbie was already familiar with the concept of Salary Sacrifice; in fact, both she and her employer were already contributing 8% each via a salary sacrifice arrangement. However, after detailed discussions, we decided to revisit this setup to see if it could be optimised further.
For those unfamiliar, Salary Sacrifice is an agreement where you “sacrifice” a portion of your gross salary, and in exchange, your employer pays that exact amount directly into your pension. Because the money never hits your bank account as “income,” you don’t pay Income Tax or National Insurance Contributions (NICs) on that portion.
The Strategy: Increase Salary Sacrifice from 8% to 24%
We decided to increase Abbie’s employee pension contributions from 8% to 24% via salary sacrifice.
Why 24%? This specific figure was chosen because it was affordable for Abbie and, crucially, it brought her taxable earnings down to £99,560. By dipping just below that £100,000 threshold, Abbie fully regained her £12,570 tax-free Personal Allowance.
Results: How Much Tax Can Pension Salary Sacrifice Save?
To see the impact for yourself, take a look at the comparison below, which highlights the sheer efficiency of this approach:
In the short term, the “cost” to Abbie is a reduction of £671 per month in her pocket. However, in return, she is putting an extra £20,960 per year into her pension.
Over a 10-year horizon, even without accounting for investment growth, the cumulative effect is incredible. Abbie is on track to save in excess of £129,000 in tax while boosting her retirement savings by ~£210,000 compared to her previous trajectory. This gives her the ultimate luxury: choice. She now has the potential flexibility to retire earlier or enjoy a significantly higher standard of living when she does.
Things to Consider Before Using Salary Sacrifice
While the benefits are significant, there are a few nuances to keep in mind:
- Employer Participation: Not all employers offer salary sacrifice. However, given the significant tax savings available to both you and your employer (who saves on their own NICs), it is certainly worth asking your HR department if they can implement it.
- Accessibility: You cannot access pension savings until the minimum pension age, which is currently 55 but rising to 57 in 2028.
- Affordability: You must ensure that the reduced take-home pay is affordable for your lifestyle on an ongoing basis.
- Future Legislation: From 2029, the government plans to limit the National Insurance advantage of salary sacrifice. Only the first £2,000 per employee per year of pension contributions made via salary sacrifice will remain exempt from employee NICs. However, the Income Tax benefit will remain in full, meaning salary sacrifice is expected to remain an incredibly tax-efficient way to save.
- Annual Allowance: Be mindful of your total annual contributions; exceeding the Annual Allowance can trigger an unexpected tax charge.
The Pentins Financial Planners Approach
While the tax benefits of Salary Sacrifice are substantial, we believe that saving tax should never be the sole driver of your strategy. At Pentins, we take a life-centered approach to financial planning that puts your personal goals and aspirations at the heart of the conversation. Our role is to ensure your money supports the future you want to live, creating a plan that looks at your entire life, not just your payslip.
If you would like to see how a bespoke strategy could work for you, book a free initial consultation with me today.
About Daniel Barrett
Daniel Barrett is a Chartered Financial Planner specialising in pensions and retirement planning. He enjoys helping people navigate complex tax rules to save tax and accumulate wealth so they can live their best lives.
Important note: This article is for information only and does not constitute personal financial advice. It is based on current UK tax rules, which may change. Tax treatment depends on individual circumstances.