High Earners And Salary Sacrifice
Salary sacrifice is an alternative way to save into a pension, cut your income tax, and reduce your National Insurance Contributions (NICs) all at once.
You receive a lower salary, but your take home pay might be the exact same or higher, and extra money is paid into your pension by your employer.
How Does It Work?
If you pay tax at the higher 40% or 45% rates, salary sacrifice means you don't have to claim back the extra tax relief yourself - as you are never taxed on those contributions in the first place - and you don't have the 2% NI deducted on those contributions either.
To deposit £100 in your pension pot, you only have to give up £58 from your pay packet, as no tax or NI is deducted as a higher rate payer. For a top-rate payer, you only give up £53.
Is It Right For You?
Be aware that salary sacrifice can have a knock-on effect on your annual allowance (AA).
Annual Allowance is how much you and your employer can put into your defined contribution pension scheme each year without paying tax on these savings. If you exceed the allowance, then you will be taxed on the amount above the threshold and you will be faced with an annual allowance charge.
The annual allowance tax charge will probably negate most (if not all) tax relief on the excess above the annual allowance. This charge is generally taken from your income, but you can request that the charge be met from your registered pension scheme assets (known as Scheme Pays).
In the year 2022/23, the annual allowance was £40,000. For higher earners, there is a reduced annual allowance.
Top Tip! If you would like to save towards your retirement but are at risk of going over your annual allowance, put the money into an ISA or invest it instead to make the most of your savings.
Tapered annual allowance
There is a reduced annual allowance for those with an ‘adjusted income’ of over £240,000.
See the table or, to understand how tapered allowance is calculated,
The reduction works by operating a £1 reduction in the annual allowance for every £2 of adjusted income above £240,000, subject to a minimum annual allowance of £4,000. So, those with an adjusted income of £312,000 or more in a tax year will have a £4,000 annual allowance for that tax year.
| Adjusted income | Reduction in annual allowance | Annual allowance |
|---|---|---|
| £240,000 | £0 | £40,000 |
| £250,000 | £5,000 | £35,000 (tapered) |
| £260,000 | £10,000 | £30,000 (tapered) |
| £270,000 | £15,000 | £25,000 (tapered) |
| £280,000 | £20,000 | £20,000 (tapered) |
| £290,000 | £25,000 | £15,000 (tapered) |
| £300,000 | £30,000 | £10,000 (tapered) |
| £310,000 | £35,000 | £5,000 (tapered) |
| £312,000 | £36,000 | £4,000 (tapered) |
Keep a note of your total pension contributions and ensure that you are not going over the tapered annual allowance for this tax year, which could result in a huge loss of annual allowance and a tax charge of 45%.