Six-figure earners could be dragged back into a costly tax trap if the chancellor cuts salary sacrifice schemes in the budget next month.<\/p>\n
Experts fear the schemes, which allow workers to exchange part of their salary for non-cash benefits such as pension contributions to reduce their income tax bill, are under threat because of HM Revenue & Customs (HMRC) research assessing the impact of stripping them back.<\/p>\n
Doing so would be a heavy blow to parents of young children caught in the so-called \u00a3100,000 tax trap, who often use salary sacrifice to retain childcare benefits that are lost once they cross this salary threshold.<\/p>\n
Six-figure earners are taxed more than 60 per cent on their income between \u00a3100,000 and \u00a3125,140 a year. This is because on top of paying the 40 per cent higher rate of income tax and 2 per cent national insurance they also lose their \u00a312,570 tax-free personal allowance. This is lost at a rate of \u00a31 for every \u00a32 earned above \u00a3100,000, until it is completely gone once you earn \u00a3125,140 a year.<\/p>\n
The \u00a3100,000 cliff edge is even steeper for parents. Households where one person earns more than \u00a3100,000 do not qualify for tax-free childcare, an account that can be used to pay for childcare where the government adds \u00a32 for every \u00a38 deposited, worth up to \u00a32,000 a year per child. <\/p>\n
\u2022 The curse of the \u00a3100k salary \u2014 readers\u2019 stories<\/a><\/p>\n They also do not qualify for 30 hours a week of free childcare (such as at a nursery) in term time for children aged nine months to two years, and also only get 15 free hours for three and four-year-olds instead of 30.<\/p>\n For two children, 30 hours of free childcare and full tax-free childcare could be worth about \u00a315,550 a year, based on the average cost of a 50-hour-a-week nursery place of \u00a3341 a week.<\/p>\n How salary sacrifice works<\/p>\n Because the \u00a3100,000 threshold is based on what is called adjusted net income, which does not include pension contributions, high earners can reduce their tax bill and parents can keep these benefits by giving up some of their income \u2014 which can be done through salary sacrifice. For those with children, childcare help can be worth far more than the earnings they divert to their pension.<\/p>\n They avoid paying national insurance and income tax on their contributions, and may also benefit from employer contributions on top. Their workplace also avoids paying employer national insurance, which was increased from 13.8 per cent to 15 per cent in April.<\/p>\n For example, if somebody earning \u00a3110,000 a year contributed \u00a310,000 to their pension through salary sacrifice, they would pay \u00a36,000 less in tax and keep their tax-free personal allowance and childcare benefits. If they had two children in nursery and were paying the average fees it would be very likely that they would end up better off \u2014 despite earning less \u2014 and with more in their pension too.<\/p>\n