What is salary sacrifice? In short, it’s a great way to reduce your taxable income by agreeing to give up part of your salary in exchange for something else of value. This article will explain precisely how it can help you lower your taxes and save money.
Read on to find out!
What Is Salary Sacrifice?
Commonly known as salary packaging, salary sacrifice is an arrangement between an employer and his employee, where the employee agrees to have a specific amount deducted from their pre-tax salary for non-cash benefits.
Salary sacrifice can reduce your taxable income, meaning you’ll only pay taxes on your decreased salary or wage.
There’s no limit to the amount you sacrifice; however, if you choose super contributions as a benefit to your salary sacrifice in Australia, you must ensure that the agreement doesn’t exceed the annual cap for concessional contributions.
How Does Salary Sacrifice Work?
When you enter into an employee salary sacrifice arrangement, the amount of money that you agree to sacrifice is deducted from your gross salary before tax is calculated. This means that you pay less income tax and social security contributions on the amount of salary that you give up. The result is a reduction in your taxable income and, ultimately, a lower tax bill.
Tax salary sacrifice has to be made in advance right when you start working at a new job, but you can also do it if you’ve already been employed for some time.
It’s important to note that previous work payments, bonuses, commissions, and leave entitlements won’t be registered within your salary sacrifice.
Employees have the right to renegotiate the benefits, and with a renewable contract, they can even renegotiate the amount that needs to be sacrificed prior to each renewal.
Salary Sacrifice Arrangements for Employees
The benefit options you get out of your salary sacrifice depend solely on your employer. Common benefits include employer contributions to your superannuation and the expense of items including automobiles (usually through a novated lease), phones, and laptops, which is usually in return for a set proportion of your pre-tax income or salaries. It’s up to you to choose whichever works best for you, but first, you’ll need to be aware of the types of benefit categories that exist.
- Fringe benefits – This category includes benefits such as cars, property, loan repayments, school fees, and child care fees that all come with a fringe benefits tax (FBT) that is usually paid by your employer.
- Exempt benefits – You get portable electronic devices, computer software, protective clothing, tools of the trade, and briefcases; however, employers don’t pay for FBT.
- Superannuation – Salary sacrifice super contributions are considered employer contributions with no FBT included. If these contributions are made for a spouse, associate or a non-compliance super fund, you’ll be required to pay off an FBT.
Note: If you choose to save up money for a comfortable retirement and you’re dissatisfied with your decision, you can determine the budget and change your superannuation.
What Is an Australian Super Salary Sacrifice?
Superannuation salary sacrifice can be easily used to boost one’s pension contributions without any additional expenses. You can save up a significant amount of money just by having a portion of your before-tax salary paid into your super fund.
Because salary sacrifice super contributions are taxed at 15%, a number quite lower than the marginal tax rate, you end up paying less tax while simultaneously growing your super balance. Furthermore, these contributions are paid on top of the employer’s compulsory super contributions at a 10.5% rate of your salary.
Note: If you want to find out more about contribution taxes in super, read this detailed guide.
Salary sacrifice is a great way to lower your taxes and save money. It is important to do your research and speak with a financial advisor beforehand to see which option is right for you. Choose carefully, and don’t rush with agreements so that you can peacefully enjoy all the salary sacrifice benefits.
1.Does salary sacrifice affect tax return?
Yes, salary sacrifice does have an impact on your tax return. By cutting down taxes during the year you get paid, you save taxes instead of maximising your refund when lodging an e-tax return.
2.What are the disadvantages of salary sacrifice?
Although salary sacrifice brings a lot of advantages to the table, it can also cause a lack of accessibility, fluctuations in savings, and a possible reduction in employer contributions. This is why we always suggest being careful when deciding on your agreement.
3.How much can I salary sacrifice?
While there’s no limit to the amount you can sacrifice, you mustn’t exceed the $27,500 super limit if you don’t want to be charged with a marginalised tax rate. Read our comprehensive guide, ‘What Is Salary Sacrifice?’ to learn more about the benefit categories.