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Salary Sacrifice

Salary Sacrifice Explained

Salary sacrificing is the practice of taking part of an employee’s remuneration as concessionally taxed benefits instead of fully assessable salary. By opting for salary sacrifice, individuals can choose to receive a portion of their income in the form of non-cash benefits, such as a company car, additional vacation days, or contributions to a retirement savings plan.

What is Salary Sacrificing?

Salary sacrificing involves an agreement between the employee and employer, where the employee agrees to sacrifice a portion of their salary in exchange for specific benefits. By doing so, employees can effectively reduce their taxable income and potentially enjoy a higher take-home pay.

The benefits of salary sacrifice are twofold. Firstly, it allows employees to receive certain benefits in a tax-effective manner, which can result in significant tax savings. Secondly, it offers employers a way to attract and retain talent by providing additional incentives and benefits beyond traditional salary payments.

How Salary Sacrifice Works

The process of salary packaging involves several steps. Firstly, the employee and employer need to agree on the portion of the employee’s earnings that will be sacrificed and the specific benefits that will be received in return. This is typically outlined in a salary sacrifice agreement, which clarifies the terms and conditions of the arrangement.

Once the agreement is in place, the employer deducts the agreed-upon amount from the employee’s salary payments and uses those funds to provide the chosen benefits. These benefits can vary depending on the employee’s preferences and the options available within their organisation. Common examples of salary sacrifice benefits include pension contributions, health insurance, childcare, transportation expenses, additional vacation days, gym memberships, and professional development courses.

It’s important to note that there may be limits on the amount of salary that can be sacrificed for certain benefits, depending on the country and jurisdiction. These limits are typically set by legislation and may vary between benefits.

Benefits of Salary Packaging

Setting up salary packaging requires coordination between the employee, employer, and often a third-party service provider. The process typically involves the following steps:

The employee and employer agree on the terms of the salary packaging arrangement, including the portion of the salary to be sacrificed and the benefits to be received.

The employee signs a salary sacrifice agreement, which outlines the details of the arrangement, including the benefits chosen.

The employer deducts the agreed-upon amount from the employee’s salary before tax calculations are made.

The employer or third-party service provider arranges for the provision of the chosen benefits, such as making contributions to a retirement savings plan or providing a company car.

Employers and employees must ensure compliance with relevant tax and employment laws, including reporting salary packaging arrangements to tax authorities.

It’s important for both employees and employers to stay informed about any legislative changes or updates related to salary packaging to ensure compliance and maximise the benefits of the arrangement.

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Frequently Asked Questions

Salary sacrifice reduces your taxable income by the amount you choose to sacrifice for non-cash benefits. This means you may pay less income tax and potentially move into a lower tax bracket.

Yes, there may be limits depending on the benefit and the country or jurisdiction. It’s important to consult with your employer or a financial advisor to understand the specific limits that apply to your situation.

In most cases, it is possible to change your salary packaging arrangement, although there may be administrative processes involved. It’s best to consult with your employer or the designated salary packaging provider for guidance.

Yes, salary packaging can potentially impact your eligibility for certain government benefits, as they are often based on taxable income. It’s important to consider any potential implications and seek advice if you’re unsure.