Pay rise vs pension contribution
Offered more money — or thinking of redirecting some into your pension? Below £100,000 it’s a balance of now-versus-later. Above it, the maths can be dramatic, because of a tax trap most people don’t know exists.
The verdict
For most earners it’s a genuine trade-off: a pay rise gives you money now; a pension contribution defers it but adds tax relief and growth. But if your income sits between £100,000 and £125,140, the answer leans hard towards pension — a pay rise there is taxed at an effective 60% (62% with National Insurance), while a pension contribution sidesteps that trap entirely. The deciding question is where your income falls.
Take the pay rise
More money in your pocket now
- Cash you can use or save today
- Flexibility — no age lock
- Boosts mortgage borrowing capacity
- Taxed at your marginal rate now
- Punishing 60% rate in the £100k trap
- Easy to absorb into spending
Pay into pension
Defer it, with tax relief on top
- Tax relief at your marginal rate
- Escapes the 60% trap entirely
- Decades of tax-free growth
- Locked until pension age (currently 55, rising)
- No help to today’s cash flow
- Annual allowance limits apply
The hidden 60% band changes everything
Most people know the 20%, 40% and 45% tax rates. Far fewer know there’s effectively a 60% band hiding between them. It appears because your tax-free personal allowance — £12,570 — is withdrawn by £1 for every £2 you earn above £100,000. You’re taxed twice on that money: once as income, and again through the allowance you lose. Add 2% National Insurance and the true marginal rate hits 62%, and HMRC estimates well over a million people are now caught in it, many without realising until a bonus lands.
This is what makes the pay-rise-versus-pension question so lopsided for high earners. Below £100,000, it’s a reasonable balance: cash now versus deferred money with relief and growth. But inside the trap, a pay rise is one of the worst-value pounds you can earn — while a pension contribution does double duty, because it reduces your “adjusted net income” pound for pound and can pull you back below £100,000, restoring your personal allowance.
£10,000: pay rise vs pension in the trap
Take someone on £100,000 offered a £10,000 rise, pushing them to £110,000 — entirely within the trap. Here’s how the two options compare. Figures are illustrative and assume salary sacrifice for the pension route.
| Option | What happens to the £10,000 | Net benefit |
|---|---|---|
| Take as pay rise | Taxed at 60% + 2% NI | ~£3,800 cash |
| Into pension | Full amount invested, allowance restored | £10,000 in pot |
Read that twice: the pay rise leaves you with under £4,000 in hand, while the pension route puts the entire £10,000 to work — and the take-home you give up to do it is only that same ~£3,800. In effect, £3,800 of foregone net pay buys you £10,000 in your pension. There’s almost no other moment in the UK tax system where the relief is this generous, which is exactly why the trap, frustrating as it is, comes with a clean escape route.
When each one wins
The pay rise wins when…
- Your income is comfortably below £100,000.
- You need the money now — debt, deposit, day-to-day.
- You’re applying for a mortgage and need higher gross pay.
- You’re already contributing enough to your pension.
The pension wins when…
- Your income is between £100,000 and £125,140 (the trap).
- You’re a higher-rate taxpayer wanting full relief.
- You don’t need the cash now and can lock it away.
- You want to keep child benefit or tax-free childcare.
One practical note worth knowing: how you pay in matters. Salary sacrifice — where your employer reduces your salary and pays it into your pension — saves both income tax and National Insurance, so it beats a personal contribution that only reclaims income tax. The mechanics vary by employer, and there are annual allowance limits on how much you can contribute with relief, so it’s worth checking your own numbers before redirecting a large sum.
Common questions
Is it better to take a pay rise or put it in my pension?
It depends on your income. Below £100,000, it’s a trade-off between cash now and deferred money with tax relief and growth. Between £100,000 and £125,140, a pension contribution is usually far better, because a pay rise in that band is taxed at an effective 60% (62% with National Insurance), while a pension contribution avoids the trap and restores your personal allowance.
What is the 60% tax trap?
Between £100,000 and £125,140 of income, your £12,570 personal allowance is withdrawn at £1 for every £2 earned. You’re effectively taxed twice on that money, producing a 60% marginal rate — 62% once you add 2% National Insurance. It isn’t a published tax band; it emerges from the allowance taper interacting with the 40% higher rate.
How does a pension contribution avoid the trap?
A pension contribution reduces your “adjusted net income” pound for pound. So if you earn £110,000 and contribute £10,000, HMRC sees your income as £100,000 — restoring your full personal allowance. The contribution effectively receives relief at the 60% (or 62%) trap rate, which is why it’s such a powerful escape for earners in this band.
How much of a £10,000 pay rise would I actually keep?
Inside the £100k trap, only around £3,800 of a £10,000 rise reaches your pocket, with about £6,200 lost to tax and National Insurance at the 62% marginal rate. The same £10,000 paid into a pension stays whole, and the take-home you sacrifice to do it is roughly that same £3,800 — so a small net cost secures a large pension contribution.
Should I always choose pension over a pay rise?
No. If you need money now — for debt, a deposit, or daily costs — or your income is well below £100,000, taking the pay rise can be the right call. A pension locks the money away until at least age 55 (rising to 57), and there are annual contribution limits. The pension advantage is strongest inside the trap or for higher-rate taxpayers who don’t need the cash.
Does a pay rise affect my mortgage or child benefit?
Yes, in both directions. A higher gross salary can increase how much a lender will offer, which favours taking the pay rise if you’re buying. But higher income can also reduce or remove child benefit and tax-free childcare. A pension contribution lowers your adjusted net income, which can protect those benefits — another point in its favour for some families.
Related tools & guides
How we put this together
Comparison uses current UK income tax and National Insurance rules: a £12,570 personal allowance tapered by £1 for every £2 of income above £100,000, producing an effective 60% marginal rate (62% with 2% NI) between £100,000 and £125,140. Pension contributions reduce adjusted net income pound for pound.
The worked example uses a £10,000 figure at the trap’s marginal rate and assumes salary sacrifice, which saves both income tax and NI. Figures are illustrative; annual allowance limits, your exact income and contribution method affect the outcome. This is not personal tax advice.
We review this comparison when tax thresholds, the personal allowance taper or pension allowance rules change.