What is salary sacrificing?
It’s a term familiar to most of us… and the main thought that comes to mind when you hear salary sacrifice is something like “I know that’s a good tax thing”. You’re right, it can be a great tax strategy for employees! Here’s what you need to know.
In a nutshell, salary sacrificing (also known as salary packaging or total remuneration) is when you take home less income in return for certain benefits. Less income means less taxable income… means less tax liability. Hooray! But what other considerations are there?
Key Insights
- Salary sacrificing, also known as salary packaging, allows employees to forgo part of their pre-tax salary in exchange for non-cash benefits, reducing taxable income and potentially offering significant tax savings.
- Common Benefits: Includes additional superannuation contributions, car leasing, and other fringe benefits, with unique offerings for different industries such as healthcare and non-profits.
- Employer and Employee Benefits: Employers can improve employee retention and manage operational costs, while employees gain through improved financial planning and increased retirement funds.
What kind of benefits can you receive from salary sacrificing?
Common examples:
- Additional superannuation contributions
- A car
- Mobile phone
- Laptop
- Gym memberships
- Car parking
Less common examples (and usually only offered by big businesses, non-for-profits and some other particular industries like public hospitals):
- Payment of your expenses like loan repayments, childcare costs or school fees
- Living away from home benefits such as rental payment or public transport payment
It’s important to remember that salary sacrificing usually pertains to items that are directly related to employment. The less common examples are occasionally offered by big businesses and the main reason for that is these kinds of benefits are liable for FBT – which the business also has to pay.
The benefits available to you via your workplace will vary depending on their policies around it so take this list as ‘broadly speaking’ and discuss it directly with your employer.
Salary sacrificing in non-for-profits and healthcare
Why is there potential for excellent salary sacrificing benefits in industries such as non-for-profits and healthcare (public hospitals in particular)? Because it’s broadly recognised that people in these industries deserve higher wages. Offering salary sacrifice incentives means that these employees are able to achieve a higher net income in their pockets. Home loan repayments and meals and entertainment allowances are benefits that many people in these industries can expect.
How much salary can you sacrifice?
When it comes to superannuation contributions, there’s a defined line in the sand (more on that below). For the other benefits however, it will depend on your workplace. There’s no ‘limit’ pur se, rather what your employer is willing to offer. You can scratch the Bentley off your list…
Salary sacrificing superannuation
This is the most common form of salary sacrificing and for good reason – additional super contributions before your income is taxed is a smart way to both save on the tax bill and increase your savings for the future.
Usually, a super contribution is taxed at 15% which tends to be much lower than the marginal tax rate your income is liable for. If you need a reminder of tax brackets you can find those here.
These contributions are in addition to the 11% of compulsory contributions made by your employer. You can contribute $27,500 in total per financial year to your superannuation at the 15% tax rate. Check how much your 11% adds up to across the year and then calculate how much extra you could elect to contribute via salary sacrifice contributions to reach that maximum cap of $27,500. If you go over this amount, the contributions will be taxed the same as your marginal tax rate (so if you earn between $45k – $120k and are taxed at 32.5%, every dollar over the $27,500 into your super contributions will also be taxed at 32.5%).
How much money can I save by salary sacrificing?
This is of course dependent on how much of your salary you’re sacrificing. But to give you an idea:
Without salary sacrifice:
- Your annual income is $80k
- Your taxable income is $80k
- Medicare levy is $1600
- Tax payable is $18,067
- Net income after tax: $61,933
With salary sacrifice:
- Your annual income is $80k
- You salary sacrifice $5k
- Taxable income: $75k
- Medicare levy is $1500
- Tax payable is $16,342
- Net income after tax: $58,658
So in this example, you’ve saved $1,725 in tax and whilst you’ve got $3,275 less in immediate take home salary, you’ve also gained $5000 in whatever benefits you chose – whether that’s a car, electronic device or super contribution. As you can see it’s a personal decision often based on what matters most to you – your net income or saving some tax dollars and enjoying one of the available benefits.
To calculate an example more accurate to your situation, head to tax calc.
If you need further help with anything tax advice, give us a call.
Comparing Superannuation Contributions vs. Higher Salary
When considering salary sacrificing, employees often face the decision of whether to allocate more towards superannuation contributions or opt for a higher salary. Both options present unique advantages and potential drawbacks. It is essential to evaluate each choice based on immediate financial needs, long-term retirement goals, and tax implications.
| Criteria | Superannuation Contributions | Higher Salary |
| Tax Benefits | Contributions are made pre-tax, reducing taxable income | Higher salary is fully taxable, potentially increasing tax liability |
| Retirement Savings | Increases retirement savings, benefiting from compounding interest | Less direct impact on retirement savings unless personally invested |
| Immediate Spending Power | Reduces take-home pay, limiting immediate disposable income | Increases take-home pay, providing more immediate disposable income |
| Long-Term Financial Security | Enhances long-term financial security through boosted superannuation | May contribute to long-term security if a higher salary is saved or invested |
| Employer Contributions | Often complements employer super contributions for greater total savings | Does not directly affect employer contributions to superannuation |
| Flexibility | Less flexible, locked into retirement savings until a certain age | More flexible, providing immediate access to funds for various needs |
| Risk and Return | Lower risk with stable returns through super funds | Potential for higher returns but also higher risk if self-invested |
Step-by-Step Implementing Salary Sacrificing Schemes with Financial Advisory Support
Implementing a salary sacrificing scheme can be a highly effective way to offer attractive benefits to employees while managing operational costs. Here’s a step-by-step guide to help you set up a robust salary sacrificing program with the support of financial advisors.
Step 1: Understand the Basics
- Identify Eligible Benefits: Determine which benefits (e.g., superannuation contributions, car leasing) will be part of the salary sacrificing scheme.
- Consult Tax Regulations: Familiarize yourself with the tax rules and regulations related to salary sacrificing in your region to ensure compliance.
Step 2: Assess Employer Readiness
- Evaluate Financial Position: Assess whether your business is financially equipped to implement a salary sacrificing scheme.
- Employee Demand Survey: Conduct a survey or gather feedback to understand whether your employees are interested in such benefits.
Step 3: Design the Salary Sacrificing Plan
- Set Clear Objectives: Define what you aim to achieve with the salary sacrificing scheme, such as attracting talent or improving employee retention.
- Customize Benefits: Tailor the benefits to meet the needs of your employees while aligning them with your financial capabilities.
Step 4: Engage Financial Advisors
- Select a Financial Advisor: Choose a financial advisor experienced in employment benefits and tax optimization.
- Develop a Strategy: Collaborate with the advisor to develop a comprehensive strategy that outlines how to implement and manage the salary sacrificing scheme.
Step 5: Plan Execution
- Draft Employee Agreements: Prepare detailed agreements outlining the terms and conditions of the salary sacrificing arrangement.
- Set Up Payroll Adjustments: Ensure your payroll system can handle salary sacrifices efficiently. Update software and train staff if necessary.
- Communicate with Employees: Clearly explain the benefits and procedures to all employees, addressing potential questions and concerns.
Step 6: Monitor and Review
- Track Contributions: Regularly monitor employee contributions and ensure they are within the legal limits and regulations.
- Review Performance: Periodically review the effectiveness of the salary sacrificing scheme in meeting its objectives.
- Seek Feedback: Continuously seek feedback from employees to understand their experience and make necessary adjustments.
Step 7: Ongoing Support and Updates
- Regular Financial Reviews: Schedule regular reviews with your financial advisor to stay updated with any changes in tax laws or financial strategies.
- Update Policy Documentation: Keep all policy documents up-to-date and ensure employees are informed of any changes.
- Provide Continuous Training: Offer ongoing training for HR and payroll departments to manage the scheme effectively.
Implementing a salary sacrificing scheme with the aid of financial advisors can significantly streamline the process while ensuring that both the business and its employees reap the full benefits. Consider these steps to create a well-structured and effective salary sacrificing plan that aligns with your organizational goals and supports your employees’ financial well-being. For guidance in integrating a comprehensive salary sacrificing scheme, consulting experts from our trusted accountants in Melbourne, Sunshine Coast and Perth can provide valuable insights.
Additionally, specialized expertise from Xero accountants, along with expert advice in small business bookkeeping and carbon accounting, can ensure that all financial aspects of your business are managed efficiently.
FAQ
How does salary sacrificing work?
Salary sacrificing involves an agreement between an employee and employer where the employee forgoes part of their pre-tax salary in exchange for non-cash benefits such as additional superannuation contributions or a car lease. This arrangement reduces the employee’s taxable income, potentially offering tax savings and other financial advantages.
In short, what is salary sacrificing?
Salary sacrificing is a financial arrangement where an employee chooses to give up part of their pre-tax salary in exchange for specific benefits, thereby potentially reducing their taxable income and optimizing their financial planning.
How much can I salary sacrifice into superannuation?
From 1 July 2024, the concessional contributions cap is $30,000 per year (Source: ATO). This limit includes employer contributions, so it is important to monitor your total contributions to avoid exceeding the cap.
Can I salary sacrifice a home loan according to the ATO?
The Australian Taxation Office (ATO) does not allow salary sacrificing directly into home loan repayments. However, other benefits such as additional super contributions or car leases are permitted options.
Does Salary Sacrificing Provide Significant Tax Savings?
Yes, salary sacrificing can provide significant tax savings by reducing your taxable income, which may place you in a lower tax bracket. This allows for more effective tax planning and increases the amount of pre-tax income allocated toward long-term benefits like superannuation.
Why Should Employers Offer Salary Sacrificing?
Employers should offer salary sacrificing to enhance their compensation packages, making them more attractive to potential and current employees. This strategy can also help in retaining staff, reducing overall operational costs, and providing tax-efficient solutions for employee benefits.
How Can Employees Benefit from Salary Sacrificing?
Employees benefit from salary sacrificing by potentially lowering their taxable income, saving on taxes, and increasing their retirement savings through additional superannuation contributions. This financial planning tool can result in a more secure financial future and better overall compensation benefits.
