Is salary sacrificing worth it?

How to make your pre-tax dollars work for you.

Whether you plan to increase your super balance or save on significant expenses like a car, health insurance or childcare, salary sacrificing can help make your wage go further.

Salary sacrificing is an arrangement with your employer to pay for an item or benefit out of your pre-tax income.

This means your overall taxable income is reduced because purchases are made before your tax is calculated.

Who benefits?

Salary sacrificing is usually most effective for people on middle to high incomes. Once you pay 32.5% or more in tax, you can do more with your pre-tax dollars.

For example, you might package a salary of $125,000 to receive $90,000 as income and a $35,000 car as a benefit.

This benefit reduces your taxable income to $90,000, placing you in a lower tax threshold, reducing your taxable income and providing you with the car benefit.

On the other hand, there are few tax savings for lower-income earners as they are already in a low tax bracket.

Consider whether salary sacrificing will negatively affect your day-to-day cash flow as these contracts are usually locked in place for a few years.

What can I salary Sacrifice?

Your employer will have a list of items you can salary sacrifice. They may have to pay fringe benefits tax on benefits they provide employees, so options could be limited.

Common items include a car, laptop, tools of trade or protective clothing, childcare fees and health insurance. Check with your payroll team to find out what your entitlements are.

Ask for a quote on the total cost of the item being purchased to make sure it will be beneficial to you in the long term.

Saving on tax can seem inviting, but it’s essential the overall cost and benefits work for your circumstances.

Superannuation

Salary sacrificing to superannuation could enable you to not only reduce your taxable income but contribute towards your retirement savings.

Your employer makes contributions to your superannuation before they calculate tax on your income.

It’s important to remember that limits apply when contributing to your superannuation. These change annually, so review your contributions regularly to ensure you don’t over-contribute as this can have negative tax implications.

How do I get started?

You must set up the salary sacrifice package with your payroll team before making any payments or contributions. You can’t package your salary after you’ve earned it.

For more information, seek further advice from a registered tax agent or search “salary sacrifice arrangements for employees” on the Australian Taxation Office (ATO) website.

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person's particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.