Have you been wondering what salary sacrifice is and how it might benefit you?
Normally, the word sacrifice would usually suggest a loss or giving away something of value. However, in the world of work, this may actually have the opposite meaning.
Salary sacrifice is actually a pretty smart concept that can save you money and lead to other benefits further down the line.
Because there are so many things involved with salary sacrificing, it is important to understand what they are, the possibilities that arise from them, and whether than can be a benefit or burden to your financial feature.
So in this post, we’ll cover everything you need to know from what salary sacrifice is to if it may be a good idea for you.
Ready? Let’s dive right in.
What is Salary Sacrifice?
Also referred to as salary packaging, salary sacrifice is a method of paying for certain benefits with a pre-tax salary which in turn reduces your overall taxable income.
An employee enters into an agreement with their employer to exchange part of their future salary for benefits such as health insurance, childcare, and loan repayments, etc.
For example, if your income was $75 000 per year before tax, but then you choose to have $10 000 per year for additional super contribution, then that would mean you’ll only get on the remaining $65 000 after additional contributions to your super.
Salary sacrifice thus reduces the amount of income tax that you’ve got to pay while giving you great benefits at the same time.
How Does Salary Sacrifice Work?
First, there must be an agreement between you and your employer. In that agreement, an agreed amount will be deducted from your pre-tax salary towards your benefit of choice.
Something else to note is that you can’t do salary sacrifice on salaries, wages and commissions that you had previously accrued before you entered into an agreement with your employer.
What Can You Salary Sacrifice?
What you can salary sacrifice varies from employer to employer, however, there are some common benefits that you can take. Below are the most popular:
- Superannuation: this is a great one as not only will you receive a tax break, but also no fringe benefits tax(FTB) applies to your employer. It’s important to note that you may not have access to your super until retirement unless you meet some requirements.
- Portable electronic devices: For any work-related benefits such as buying new a laptop computer, mobile phone, computer software, etc. also qualify for as part of salary sacrifice and it’s also fringe benefits tax-exempt.
- Childcare- you may be able to salary package the fees for childcare, school fees, etc. This is great for working parents.
- Essential tools of the trade- tools that are needed for work can also be purchased with your salary sacrifice. This can mean savings on income tax and fringe benefits tax. However, these must only be tools of the trade, not general household items.
Salary sacrifice allows you to reduce your taxable income and make use of pre-tax funds in order to grow your wealth faster. However, as appealing as it may be, it may not be the right strategy for others, especially those in low-income brackets.
To be sure that salary sacrifice may be right for you, contact your local tax accountants in Brisbane or wherever you live for help and advice.
The Pros & Cons of Salary Sacrifice
Salary Sacrifice can be a great way for lowering your tax burden while also receiving benefits for your contributions. However, while this may work for some people, it might not be so appealing, or worse, a bad idea to others.
So here are the pros and cons of salary sacrificing.
Pros.
- Reduction on personal income tax rate- Any amount contributed will not be taxed up to the maximum of 15%.
- Future savings for your superannuation into a portfolio that you will eventually receive. This is not taxed until it’s paid out to you, so can give a great tax break for your retirement savings.
- Payment for insurances- insurances such as motor vehicle registration and the likes are bought for you with pre-tax money. Again, this can be a great chance to save some income tax on these items.
- Investment earning tax is reduced- if you invest your money via salary sacrifice into a managed fund, the income generated by that managed fund will be taxed at 15% instead of your normal marginal tax rate. This is because the investment earnings are taxed as “unearned income.”
Cons.
- Contribution limits apply- you can’t salary sacrifice more than $25,000 a year. This is the maximum amount you can contribute to your superannuation account each financial year. If you go over this limit, there are penalties and additional taxes that will apply.
- Death benefits tax applies- the benefit of having pre-tax money in your superannuation account is that any earnings are taxed at 15% instead of higher personal income tax rates. This applies even if you die early, which could mean a greater loss for your loved ones.
- Inaccessible funds- Once you’ve set up an agreement with your employer to salary sacrifice, the money you want to put into superannuation isn’t accessible until you reach a certain age.
- Tax contribution surcharge- If you earn above a certain level, you get slapped with an extra 15% tax on the amount your salary sacrifices. This is to encourage people to take more responsibility for their own retirement savings.
Does salary sacrifice make financial Sense to you?
The effectiveness of salary sacrificing will depend on individual circumstances. It is therefore important to have an understanding of how salary sacrifice works, its pros and cons before making a decision about whether you want to implement it in your own situation.
If you still feel confused, it may be best to seek professional advice from your accountant before agreeing to a salary sacrifice arrangement.
