Around 4.8 million Brits are expected to be paying higher tax rates over the next five years. An expert is urging high earners – those earning more than £50,270 per year – to make a key check to reduce the impact of tax hikes.
Although a pay rise is usually welcome, it can come as a shock when the increase in take-home pay feels less than it should be. As income tax thresholds are frozen until 2031, some people may find themselves giving more to the taxman. If you earn over £50,270, Mike Ambery, Retirement Savings Director at Standard Life plc, recommends using pension salary sacrifice to save on income tax and National Insurance (NI).
He explained: “One of the simplest and most effective ways to reduce the impact of moving into the 40% tax band is to increase your pension contributions – particularly through salary sacrifice, if your employer offers it.
“Because contributions are made from your gross salary, salary sacrifice can reduce the amount of income taxed at 40% and lower the National Insurance (NI) you pay, while boosting your pension in a tax‑efficient way. Some employers may also share part of their NI saving, further increasing contributions.”
He added: “For example, if someone earning £50,000 receives a £5,000 pay rise, taking their salary to £55,000, £4,730 of that increase sits above the higher‑rate tax threshold of £50,270. Normally, that slice would be taxed at 40%, with NI also due – meaning £2,062 goes to HMRC, before other factors like student loans are considered.
“By paying the full £5,000 into a pension through salary sacrifice, they can avoid higher‑rate tax on that income, cut their NI bill, and have the entire £5,000 added to their pension before tax.”
However, the government is set to change salary sacrifice rules, specifically for pension contributions, from April 2029. It will introduce a £2,000 annual cap on the amount of pension salary sacrifice that is exempt from National Insurance Contributions.
HM Treasury said: “The government is changing how salary sacrifice for pension contributions works. From April 2029, the amount that is exempt from National Insurance contributions (NICs) will be capped at £2,000 a year for employee contributions made via salary sacrifice.
“Salary sacrifice is when you agree to reduce your gross salary or sacrifice a bonus and, in return, your employer pays the same amount into your pension.”
The government said the change will limit the benefit of salary sacrifice arrangement. They explained how the costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes”.
They added: “It makes the system fairer and more sustainable, and means that any salary sacrificed above the £2,000 cap is treated the same for tax purposes as other pension scheme arrangements.”
