Salary sacrifice for parents: new ii calculations illustrate perks

• A parent earning £110,000 who salary sacrifices £10,000 to avoid the £100,000 tax cliff edge would save £6,200 in tax.
• Effectively, a parent in this scenario trades £3,800 of after-tax spendable income for £10,000 in their pension - a tax efficiency of 62% - plus the potential of almost £10,000 in childcare benefits.
• Employers would save £1,500 in national insurance contributions in this scenario.
• A parent earning £65,000 sacrificing £5,000 to avoid the High Income Child Benefit Charge would trade £2,338 of after-tax spendable income (including the HICBC) for £5,000 into their pension - a tax efficiency of almost 47%.

With HMRC reviewing salary sacrifice schemes, which could potentially change the rules, new calculations from interactive investor, the UK’s second-largest DIY investment platform, illustrate their benefits to parents and employers.

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A salary sacrifice pension allows you to exchange some of your salary, bonus, or redundancy payment for a contribution or regular contributions to your pension. Since you give up part of your salary, you reduce the amount of income tax and national insurance (NI) you pay. This means that a pension contribution costs you less than if it is made from your taxed pay. 

Employers may also enable salary sacrifice into a Self-Invested Personal Pension (SIPP), which offers greater control and a wider range of investment options.

New interactive investor calculations show that a parent of two children earning £65,000 who sacrifices £5,000 of their salary to avoid triggering the High Income Child Benefit Charge (HICBC), which applies to earners over £60,000, could save £2,100 in income tax and NI, as well as avoid a HICBC of £562 - £2,662 in total.

Child benefit is effectively withdrawn at a rate of 1% for each £200 earned over £60,000 a year by the higher-income partner, until it is fully withdrawn where the adjusted net income of the higher-income partner reaches £80,000 a year.

Employers would save £750 in NI contributions in this scenario.

Effectively, a parent in this scenario would trade £2,338 of after-tax spendable income (including the HICBC) for £5,000 into their pension - a tax efficiency of almost 47%.

Meanwhile, a parent earning £110,000 who salary sacrifices £10,000 to avoid the £100,000 tax cliff edge - where the personal allowance is reduced by £1 for every £2 of income above £100,000 - would save £6,200 in tax. Employers would save £1,500 in NI contributions.

The tax cliff continues until income reaches £125,140, at which point the entire personal allowance is withdrawn.

Crucially, they could also remain eligible for 15 or 30 hours of free childcare, worth up to £7,500 per child per year, as well as Tax-Free Childcare, worth up to £2,000 annually.

Effectively, a parent in this scenario trades £3,800 of after-tax spendable income for £10,000 in their pension - a tax efficiency of 62% - plus the potential of almost £10,000 in childcare benefits.

Employers would save £1,500 in NI contributions.

Tax savings with salary sacrifice

Source: interactive investor

Myron Jobson, Senior Personal Finance Analyst at interactive investor, says: “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.

“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. That’s a win on several fronts: lower tax, a healthier pension pot, and continued childcare benefits.”

“But while the numbers are compelling, it’s important to remember that salary-sacrificed income isn’t accessible 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. Retirement may be a long-term goal, but financial well-being here and now matters just as much. Salary sacrifice should be used thoughtfully - as part of a broader plan that reflects both your current needs and future aspirations.”