Pay rise? Bonus? New tax bracket? Tax worries?

If you’re lucky enough to receive an end-of-year bonus, or even a pay rise, that’s reason to be cheerful… right?

But what if that ‘little bit extra’ pushes you into a new tax bracket? Nothing has the potential to dampen the spirits more than discovering the reward for your hard work could come at a cost.

In the past, many have relied on salary and bonus sacrifice to effectively keep more of what they earn. So, what’s changed?

• Get updates on markets, ISA funds, pension saving and much more

The new salary sacrifice cap

Historically, pension contributions made through salary sacrifice haven’t been subject to Income Tax or National Insurance, which has made the approach attractive for both employees and employers.

From April 2029, however, the government will introduce a limit on how much salary can be sacrificed without triggering NI. The maximum saving will be capped at £2,000 a year.

Any contributions made above that £2,000 allowance will, from 2029 onwards, be subject to both employee and employer National Insurance.

Salary sacrifice is still a straightforward way to manage rising income

Until the changes are implemented, sacrifice remains one of the easiest ways to make your income work harder for you.

By giving up part of your salary in exchange for an employer pension contribution, you pay less Income Tax and NI on that portion. It’s not complicated, and for many people it takes the sting out of crossing into a higher tax band (although the benefits depend on individual circumstances).

If you’re close to a threshold - or you’ve just tipped into a new bracket thanks to a pay rise or bonus - you might want to think about whether salary sacrifice could help. It’s worth noting that not every employer offers salary or bonus sacrifice, and those that do may have specific rules or deadlines, so it’s worth checking what applies where you work.

• Read: Will salary sacrifice changes impact me?

Bonus sacrifice - helpful if you’re close to an income ‘cliff edge’

If your employer allows it, paying some or all of a bonus straight into your pension can be a practical way to stay below key tax thresholds. This can be especially useful if you’re on the cusp of moving from basic-rate to higher-rate tax, or if you’re already higher-rate and want to avoid losing things like Child Benefit or your personal allowance.

If your employer’s deadline has already passed, you can still make a personal pension contribution (for instance, into a SIPP) and claim back higher- or additional-rate tax through self-assessment.

Is salary and bonus sacrifice always a good idea?

While salary sacrifice offers plenty of advantages, it does come with considerations to weigh up.

Reducing your contractual salary can influence any benefits that are calculated from your earnings - for example, statutory maternity or paternity pay, or workplace life cover that’s linked to your salary.

If your National Insurance payments fall below certain thresholds, it could also have a knock-on effect on your State Pension entitlement.

A lower recorded salary may also make a difference when applying for a mortgage, as lenders typically assess affordability using your official pay.

And remember, any amount you redirect into your pension through sacrifice is generally inaccessible until at least age 55 (rising to 57 from 6 April 2028). So, sacrificing your salary or bonus may not be for you if you’re likely to need that money sooner.

Let’s wrap it up…

If your income has risen this year, or you're edging closer to a new tax band, the end of the year can be a helpful moment to take stock.

The current rules around salary and bonus sacrifice still offer useful advantages - but they won’t stay the same forever.

Whether you’re someone just entering higher-rate tax for the first time, or a higher earner who continues to feel the squeeze despite a solid salary, there are still steps you can take now to make the most of what’s available before the rules change.

If you’ve got over £100k to invest (which can include your pension) you might like to think about talking to a financial adviser. Learn more about our financial advice service.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.