I've had a big pay rise to £125,000 should I salary sacrifice as much as possible into my pension?

I earn £105,000 a year and have just been promoted with a £20,000 annual pay increase from June. I am wondering if I should salary sacrifice as much as possible into my pension in the next few months.

My work pension is a salary sacrifice scheme, which helps me save on national insurance and tax and has the double benefit of lowering my income, as I earn above £100,000 and get hit by the 60 per cent tax rate.

My promotion and pay increase will fall almost entirely into that 60 per cent bracket and after reading reports this week, I am worried that the government will change the system, and I will lose out.

I could theoretically afford salary sacrifice most of my monthly earnings over the next four months into my pension, to get as much in there as possible and reduce my income this tax year. My employer says it will let me do this, but would it work from a tax perspective?

Simon Lambert, of This is Money, replies: It's fitting that this question crops up in the week that NatWest, formerly known as RBS, finally fully exited taxpayer ownership.

The two may not seem directly related but the 60 per cent tax trap is a financial crisis hangover.

Britain's stake in RBS came about due to the exceptional circumstances of the financial crisis.

Cast your mind back that far and there were also some stringent tax measures brought in to deal with an urgent need to raise funds. Unfortunately, the one you refer to that creates the 60 per cent tax trap is still with us, long after the emergency passed.

In April 2009, Chancellor Alistair Darling announced the personal allowance would start to be removed at a rate of £1 for every £2 earned above £100,000. This created Britain’s highest effective official income tax rate of 60 per cent.

There are other quirks that can drive up marginal tax rates - the amount you pay on the next pound - but they depend on specific related circumstances, whereas the personal allowance removal is baked into the income tax system.

If the £100,000 threshold had moved up in line with RPI inflation, it would now be at £180,000, according to our historic inflation calculator.

The only real way to beat the tax trap is to get your income down and salary sacrifice has become a popular way of doing this, with people in the bracket often paying as much as possible into a pension.

Reports last week suggested salary sacrifice was in the Treasury's sights, as a way to claw more money in and an official report has been compiled. It remains to be seen whether rumours are true, but you should be careful about making financial decisions based solely on saving tax.

We asked an expert about where you stand on salary sacrificing as much as possible of your pension.

Anita Wright, chartered financial planner at Bolton James, replies: From a tax perspective, making significant pension contributions via salary sacrifice by the tax year end on 5th April 2026 is likely to be highly beneficial — particularly given your earnings position and the structure of your employer’s scheme.

Since your new total income for the 2025/26 tax year will be £125,000, you fall squarely within the band where the personal allowance is gradually withdrawn.

Between £100,000 and £125,140, your personal allowance (the amount of income you can receive tax-free) is reduced by £1 for every £2 earned above £100,000. This results in a 60 per cent marginal tax rate on income in that range.

Once your income exceeds £125,140, you lose the personal allowance entirely.

By using salary sacrifice to reduce your gross income below £125,000, you will recover some, or all, of your personal allowance, significantly improving your overall tax position.

One of the core tax benefits of your employer’s salary sacrifice scheme is that pension contributions are made fully by your employer, meaning they are exempt from both income tax and employee National Insurance (NI) unlike receiving additional salary.

This typically results in a more efficient outcome than making contributions from your net pay.

In addition, employers also benefit from a reduction in their own NI liability when salary sacrifice is used.

Some employers choose to pass part or all of their NI saving into the employee’s pension plan, thereby boosting the overall contribution at no additional cost to you.

This is worth checking directly with your HR or payroll team, as it depends entirely on your employer’s policy.

Your ability to do this successfully — and how much you may wish to sacrifice — will depend on several factors:

• While you note that you can manage without much of your take-home pay, it’s important to bear in mind that salary sacrifice will reduce your monthly net income — which would otherwise have been higher had you taken the additional salary instead.
• Annual Allowance: For most individuals, the pension annual allowance is £60,000 for the 2025/26 tax year. However, this includes both your contributions and those made by your employer. Contributions above this threshold may trigger an annual allowance charge unless unused allowances from previous years can be carried forward.
• · Impact on Benefits: A reduced gross salary might affect other employment-related benefits. For example, some death in service schemes or income protection policies are based on actual salary. That said, many employers calculate benefits using your notional (pre-sacrifice) salary, but this should be confirmed.
• Borrowing capacity: Mortgage lenders and other credit providers often assess affordability based on income and expenditure. A lower reported income due to salary sacrifice could impact your borrowing potential, depending on the lender.

A salary sacrifice arrangement can be put into place at any point, but must meet the following criteria:

• A formal written arrangement must be in place.
• This must be in place before the salary is actually reduced.

The arrangement must not take your salaried remuneration below minimum wage with regards to the hours worked.

You also must not also be able to demand a switch back to full salary, otherwise HMRC may contend that a valid exchange has not taken place and implement the appropriate tax treatment that you may receive less take home pay.

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Finally, while current pension legislation offers significant tax incentives, your concerns about potential future changes are entirely understandable.

Although no formal announcements have been made, it is natural for higher earners to consider acting sooner rather than later to optimise the available reliefs under current rules.

It is widely understood that the previous government commissioned a detailed report on salary sacrifice, examining its cost to the Treasury and exploring ways to potentially limit its use.

In parallel, HMRC has recently been modelling hypothetical scenarios to assess how much additional revenue could be raised through reform.

This suggests that salary sacrifice is firmly on the policy radar — and may well be considered by the current Chancellor as part of a broader effort to increase tax revenues. While no decisions have been made, the direction of research implies a growing likelihood that changes could be introduced in the next Budget.