Parents are being urged to take advantage of tax-saving pension boost, which could save families around £6,200, according to research from interactive investor.
New analysis is highlighting how parents can significantly reduce their tax burden while maintaining crucial child benefits through salary sacrifice pension schemes.
The DIY investment platform has demonstrated that parents earning between £65,000 and £110,000 can achieve tax efficiencies of up to 62 per cent
This analysis comes as HM Revenue and Customs (HMRC) reviews salary sacrifice arrangements, which could potentially alter existing rules.
Parents could save £6,200 thanks to boosting their pension via salary sacrifice
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Under current regulations, employees can exchange portions of their salary, bonus or redundancy payments for pension contributions, reducing both income tax and National Insurance payments whilst employers also benefit from lower contributions.
Parents earning £65,000 who contribute £5,000 to their pension through salary sacrifice can avoid the High Income Child Benefit Charge that affects those earning above £60,000.
The charge withdraws child benefit at one per cent for every £200 earned over the threshold until it's completely removed at £80,000.
Interactive investor's calculations show such parents would save £2,100 in income tax and National Insurance, whilst avoiding a £562 charge.
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Britons are concerned about the rising tax burdenGETTYThis totals £2,662 in savings. The arrangement means parents effectively exchange £2,338 of after-tax income for £5,000 in pension contributions, representing a tax efficiency of nearly 47 per cent.
Employers also benefit, saving £750 in National Insurance contributions.
Parents earning £110,000 who sacrifice £10,000 of their salary can save £6,200 in tax while avoiding the personal allowance reduction that occurs above £100,000.
The personal allowance decreases by £1 for every £2 earned over this threshold until it vanishes entirely at £125,140.
By reducing their income below £100,000, parents can retain eligibility for 15 or 30 hours of free childcare, worth up to £7,500 per child annually, plus Tax-Free Childcare worth up to £2,000.
This strategy effectively trades £3,800 of after-tax income for £10,000 in pension savings, achieving 62 per cent tax efficiency whilst potentially securing almost £10,000 in childcare benefits.
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PAMyron Jobson, a senior personal finance analyst at interactive investor, is encouraging parents to take advantage of this tax-saving vehicle.
He explained: "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."
He cautions that 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," Jobson adds.
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