Should I pay more into a pension to avoid the £100,000 trap?

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk. Question: My salary has just gone above £100,000 and friends keep telling me I’ve fallen into a tax trap. My husband earns around £30,000 and we have two children aged one and three, both in nursery. I was delighted by the promotion, but I’ve since discovered that crossing the £100,000 mark could affect both my tax bill and the childcare support we receive. My employer offers salary sacrifice into a pension and I’ve been told I could use this to bring my income back below the threshold. But we’re already paying huge nursery fees even with the funded hours and trying to save for a bigger home. Should I be doing everything possible to stay under £100,000, or am I overthinking it? Shorts Answer: Congratulations on the promotion. The good news is that salary alone is not what matters. The figure that counts is your adjusted net income. Crucially, that is not always the same as your salary. It includes most forms of taxable income, including savings interest, dividends and rental income, while pension contributions and Gift Aid donations can reduce it. That is why I would encourage you to look at your finances holistically rather than focusing solely on your payslip. Some families find themselves breaching the threshold not because of a promotion, but because higher interest rates have boosted the returns on their savings. Pension contributions can reduce adjusted net income, which is why salary sacrifice has become such a popular planning tool. By exchanging part of your salary for an employer pension contribution, you can simultaneously boost your retirement savings and potentially bring your adjusted net income back below £100,000. For someone earning £105,000, a relatively modest pension contribution could make the difference between remaining eligible for childcare support and losing it altogether. Viewed in that light, salary sacrifice can be a way of protecting your household budget during years when childcare costs are consuming a large share of your income. That said, financial planning is about more than tax efficiency. You are trying to raise a young family, cover nursery bills and save for a larger home. I often tell clients not to let the tax tail wag the dog. There is little point celebrating a clever tax strategy if it leaves you struggling to meet today’s financial goals. However, the nursery years are unusual. If a relatively small increase in pension contributions allows you to remain below the threshold and retain valuable childcare support, the trade-off may be well worth considering. There is also a wider point here. The personal allowance taper was introduced in April 2010 and the £100,000 threshold has never been increased. Had it simply kept pace with inflation, it would be worth roughly £159,000 today. What was originally designed to affect a relatively small group of top earners is now catching growing numbers of professionals who would not necessarily consider themselves wealthy. The childcare rules, introduced seven years later, inherited the same £100,000 cut-off. As a result, many families today find themselves caught by a threshold that reflects the economic realities of a very different era. In many ways, what you are experiencing is not simply the consequence of a promotion. It is the result of years of frozen thresholds redefining what counts as a high income.