For most people, managing the high cost of living is becoming increasingly challenging, so it’s pertinent to consider options to maximise your salary.
One such option is salary sacrifice agreements, also known as salary packaging. Whilst salary sacrificing sounds like it might take money out of your pocket, one of its key benefits is to reduce the amount of tax you pay, which could see you keeping more of your income and having more money to spend or allowing you to save directly on out-of-pocket expenses.
What is Salary Sacrifice?
Salary sacrifice is an employee benefit offered by some employers where you forego a portion of your future pre-tax salary over a specified period of time in return for an agreed benefit of similar value. This agreement allows you to reduce your assessable income and the tax that you pay overall.
Common benefits provided include additional contributions to super, additional leave entitlements, share schemes, and vehicle leasing. Depending on the employer benefits offered, this could be a great way to save money on significant expenses such as child and/or health care services by enabling you to use your pre-tax income to pay these expenses.
Who can Salary Sacrifice?
Salary Sacrifice is offered by many employers to incentivise and reward employees. Many companies use Salary Sacrifice to attract and retain staff although not all companies offer this benefit. To confirm if salary sacrificing is available to you, you need to consult directly with your employer.
Once you’ve established that this benefit is available to you, you will need to reach an agreement with your employer in writing about the future salary amount to be sacrificed and the benefits that will be provided. The agreed amount will then be deducted from your pre-tax income and allocated to your approved benefit.
How much can I Salary Sacrifice?
In Australia, all employees must at least receive the national minimum wage ($882.80 per week based on a 38-hour week from 1 July 2023), therefore you cannot salary sacrifice all of your salary if it means that your income will fall below the minimum wage. It’s also important to note that the benefits offered by an employer cannot be taken as cash payments and cannot be applied retrospectively.
Does Salary Sacrifice work for everyone?
It’s important to be aware that whilst salary sacrificing may reduce the amount of income tax that you pay, you will also be reducing your take-home pay because the amount that you sacrifice is taken out of your pre-tax income. James McFall, Managing Director from Yield Financial Planning notes “Salary sacrifice can be a great employee benefit and tax mitigation strategy but it should be considered in line with a person’s overall financial position as it may not be right for everyone”.
Additionally, as there may also be limits to the amounts that you can deduct from your salary, it’s important to speak with your financial advisor before entering any salary sacrifice agreements.