It may seem counterintuitive to opt for a lower salary, as, on paper, it will always seem better to have a higher payslip.
However, there are several instances in which taking home more pay can actually reduce your total income. This is due to tax exposure and the loss of certain benefits.
As such, it’s important to consider how your salary can affect your wider finances and what steps you can take to help ensure your income is maximised.
Read on to discover five reasons you might want to keep your salary down.
1. Maintain your Annual Allowance if you earn over £200,000
The Annual Allowance is the amount you can contribute to your pension each year while receiving tax relief on your contributions. For most people in 2026/27, the Annual Allowance is either £60,000 or 100% of your earnings, whichever is lower.
However, your Annual Allowance may reduce if your salary passes either of the following thresholds:
- £200,000 threshold income. This is your taxable income after pension contributions and other deductions.
- £260,000 adjusted income. This is your income, including all pension contributions from you and your employer.
Once you exceed these thresholds, your Annual Allowance tapers by £1 for every £2 over, and can fall to a minimum of £10,000.
So, you may want to keep your salary below these thresholds to ensure you preserve your full Annual Allowance and can continue making tax-efficient pension contributions.
2. Avoid the 60% tax trap if you earn over £100,000
The Personal Allowance is the portion of your income that remains tax-free.
For most people, it is £12,570 a year. However, once your annual income exceeds £100,000, your Personal Allowance tapers by £1 for every £2 over. This means that once your income reaches £125,140, you no longer have a tax-free portion of your income.
Because of this, you can end up paying an effective 60% Income Tax rate on the portion of your income between £100,000 and £125,140.
For instance, if you earned £110,000 a year, you would be £10,000 over the threshold. £4,000 of that would be spent on higher-rate Income Tax. But you would also lose £5,000 of your Personal Allowance, which would then also be subject to the higher rate, costing you a further £2,000.
So, of the £10,000 you earned over £100,000, you would lose £6,000, which is where the effective 60% rate comes from.
The most commonly used method of avoiding the 60% tax trap is to pay your earnings between £100,000 and £125,140 into your pension.
This comes with the double benefit of regaining your Personal Allowance while also improving the tax efficiency of the money you contribute, as it will receive relief at your marginal rate, provided you haven’t exceeded your Annual Allowance.
If you have already hit your Annual Allowance or want more immediate benefits from your income, there may also be other salary sacrifice options that could be suitable.
3. Receive dividends for greater efficiency
If you run a business, reducing your salary in favour of dividend payments can be far more tax-efficient for both you and the business.
In 2026/27, the Dividend Tax rates are comfortably below Income Tax, and are currently set at:
- 10.75% for basic-rate taxpayers
- 35.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers.
Moreover, dividends are not subject to employer or employee National Insurance contributions.
So, if you are a business owner, it may be beneficial to set up a remuneration strategy that combines a lower salary for yourself with dividend payments.
Of course, it’s important to note that the dividends you may rely on for income can only be paid if your business has made enough profit.
4. Retain Tax-Free Childcare
You may also want to keep your salary down if you have young children and have access to Tax-Free Childcare.
This is because once either you or your partner has an adjusted net income (your total taxable income minus pension contributions) above £100,000, you lose your entitlement to Tax-Free Childcare.
This can be a valuable benefit, particularly if your children are still very young, so you may want to manage your salary to ensure you remain eligible.
For instance, you could explore salary sacrifice schemes or additional pension contributions to help keep you below £100,000.
5. The High Income Child Benefit Charge
Child Benefit can amount to thousands each year, but it reduces once you earn over a certain amount.
The High Income Child Benefit Charge applies if your or your partner’s adjusted net income exceeds £60,000. For every £200 between £60,000 and £80,000, you are charged 1% of the total Child Benefit you receive, and once you reach £80,000, you lose it altogether.
If you want to preserve access to Child Benefit, you can increase your pension contributions to keep your salary under the threshold.
Get in touch
To find out if a lower salary could actually be beneficial for your finances, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
