Six-figure earners could be dragged back into a costly tax trap if the chancellor cuts salary sacrifice schemes in the budget next month.

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.

Doing so would be a heavy blow to parents of young children caught in the so-called £100,000 tax trap, who often use salary sacrifice to retain childcare benefits that are lost once they cross this salary threshold.

Six-figure earners are taxed more than 60 per cent on their income between £100,000 and £125,140 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 £12,570 tax-free personal allowance. This is lost at a rate of £1 for every £2 earned above £100,000, until it is completely gone once you earn £125,140 a year.

The £100,000 cliff edge is even steeper for parents. Households where one person earns more than £100,000 do not qualify for tax-free childcare, an account that can be used to pay for childcare where the government adds £2 for every £8 deposited, worth up to £2,000 a year per child.

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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.

For two children, 30 hours of free childcare and full tax-free childcare could be worth about £15,550 a year, based on the average cost of a 50-hour-a-week nursery place of £341 a week.

How salary sacrifice works

Because the £100,000 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 — 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.

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.

For example, if somebody earning £110,000 a year contributed £10,000 to their pension through salary sacrifice, they would pay £6,000 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 — despite earning less — and with more in their pension too.

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Some employers also offer workplace nursery salary sacrifice schemes. These allow workers to sacrifice part of their wage and spend it directly on childcare fees at a nursery that has partnered with the employer.

These can be doubly cost-effective because as well as reducing your net income and potentially letting you keep thousands in childcare help, you will not pay income tax or national insurance on the fees — a 42 per cent discount for a higher-rate taxpayer.

Earnings data suggests that thousands may be reducing their income to avoid the £100,000 threshold. There were 31,411 workers earning £98,000 a year in 2021-22, 41,041 earning £99,000, but only 31,207 earning £100,000, according to HMRC.

Ian Cook from the wealth manager Quilter Cheviot said: “Salary sacrifice is not a loophole, but a legitimate and prudent strategy that enables people to navigate an increasingly complex tax system.

“For many, it is one of the few tools available to mitigate the impact of punitive marginal rates and maintain access to key family benefits.”

Could it be on the chancellor’s chopping block?

In May HMRC published a survey commissioned by the previous government looking at the impact of stripping back tax reliefs on salary sacrifice schemes.

It modelled three options: removing national insurance relief on salary sacrifice for employees and employers; axing both national insurance and income tax relief; and capping national insurance relief at £2,000 a year.

The employers surveyed said they were against all three options.

Steve Webb, a former pensions minister who now works for the consultancy LCP, said that salary sacrifice costs HMRC an estimated £4 billion in lost national insurance income alone.

Webb, who described the HMRC research as “very unusual”, said: “I was staggered when I saw it. It’s a sign that salary sacrifice is being looked at.”

Although the survey was commissioned by the Conservative government, the chancellor has been in favour of changing tax relief on pension contributions. Rachel Reeves campaigned to cut income tax relief on contributions to a flat rate of 33 per cent in 2016, before she became shadow chancellor.

Successive governments have faced scrutiny for their treatment of those earning more than £100,000 a year, with some caught in the tax trap calling themselves Henrys (High Earners, Not Rich Yet).

The £100,000 threshold for starting to lose the tax-free personal allowance has not been changed since it was introduced in 2010. If it had increased with inflation, it would be worth about £155,000 today.

The shadow chancellor, Mel Stride, said: “Rachel Reeves seems intent on clobbering the people who already pay a significant amount of tax, which could mean many would be worse off if they get a pay rise. That makes no sense either for our economy or for the Treasury.”

HMRC denied its research showed it was planning to reform salary sacrifice schemes. It said: “These claims are totally speculative. We regularly commission independent research on various aspects of the tax system.”