How does salary optimisation work?
Around certain income thresholds, every extra pound of pay is taxed unusually harshly or triggers the loss of valuable benefits. The house view is that pension contributions, often via salary sacrifice, can be especially efficient here because they reduce your adjusted net income. Three thresholds matter most.
The 60% tax trap (£100,000 to £125,140)
Between £100,000 and £125,140, the tax-free personal allowance is gradually withdrawn. This creates an effective tax rate of around 60% on income in this band. A pension contribution in this range is unusually powerful, because it can reclaim lost personal allowance as well as save income tax. Our 60% tax trap piece goes deeper.
The High Income Child Benefit Charge (£60,000 to £80,000)
If you or your partner claim Child Benefit and the higher earner's income is between £60,000 and £80,000, a charge gradually claws it back. That makes the effective tax rate in this band higher than the headline 40%. Reducing adjusted net income through pension contributions can reduce or remove the charge and keep more of the benefit.
The childcare cliff edge (£100,001)
For parents of young children, £100,001 is a hard cliff, not a gentle taper. Crossing it can cost access to Tax-Free Childcare and funded hours, worth around £15,000 a year for some families. Because the loss is binary, earning £1 over the limit can cost thousands. Managing adjusted net income below £100,000, often via pension contributions, can protect that support.
How to think about it
These are general illustrations of how the thresholds work, not personal advice. The right move depends on your income, your goals, and whether you are affected by limits such as the annual allowance.
A common approach is to model your adjusted net income for the year, then consider whether a pension contribution makes sense given which thresholds you are near. If you have a partner, each of you is assessed separately.
Once salary is optimised, Step 5 weighs overpaying the mortgage against investing.
