Salary sacrificing can be utilised by both employees and employers for a range of non-cash benefits. Salary sacrificing can reduce your taxable income, leaving more money in your pocket in times of need.
Not all strategies of salary sacrificing are recommended and vary between cases. Some methods of salary sacrificing are restricted to concessional caps and have drawbacks if the caps are exceeded. Seek professional advice before entering into a salary sacrifice agreement with your employer.
What is salary sacrifice?
Salary sacrifice, also known as salary packaging or total remuneration packaging, is a way for employees in Australia to increase their take-home pay by sacrificing a portion of their salary in exchange for non-cash benefits. These benefits can include things like superannuation contributions, car leases, and additional leave.
How does salary sacrifice work?
When an employee enters a salary sacrifice arrangement with their employer, they agree to sacrifice a portion of their pre-tax salary in exchange for non-cash benefits. The amount of salary that is sacrificed is determined by the employee and the employer, and it is typically agreed upon in writing.
Once the salary sacrifice arrangement is in place, the employee’s salary is reduced by the agreed-upon amount, and the employer uses that money to provide the employee with non-cash benefits. These benefits can include things like superannuation contributions, car leases, and additional leave.
An example of a salary sacrifice: An employee named Jane earns $70,000 per year, she wants to increase her take-home pay and boost her retirement savings, so she agrees to sacrifice $10,000 of her salary in exchange for superannuation contributions. This will reduce her taxable income to $60,000, lower her taxes and increase her retirement savings by $10,000.
What can you salary sacrifice?
There are several types of non-cash benefits that employees in Australia can salary sacrifice, including:
- Superannuation contributions: Employees can sacrifice a portion of their salary to boost their superannuation savings.
- Car leases: Employees can lease a car through their employer and have the cost taken out of their pre-tax salary.
- Additional leave: Employees can sacrifice a portion of their salary to purchase additional leave.
- Childcare: Employees can sacrifice a portion of their salary to pay for childcare expenses.
- Other benefits like a gym membership, laptops, or mobile phones
The types of benefits that can be salary sacrificed will depend on the employer’s policies and the specific salary sacrifice agreement.
Benefits of Salary Sacrifice
One of the main advantages of salary sacrificing is that it can help employees save on taxes. By sacrificing a portion of their salary before taxes are calculated, employees can reduce the amount of income they are taxed on. This can result in a lower tax bill and more money in the employee’s pocket.
If you would like to learn more about saving taxes when salary sacrificing, contact One Click Life – your online tax agent: https://oneclicklife.com.au/contact/
Another advantage of salary sacrificing is that it can help employees save for retirement by increasing their superannuation contributions. By sacrificing a portion of their salary into their superannuation account, employees can boost their retirement savings without having to dip into their take-home pay.
Considerations before entering a salary sacrifice arrangement
It’s important to note that salary sacrificing is not suitable for everyone and it’s important to consider the impact it may have on your overall financial situation, including your superannuation. Before entering a salary sacrifice arrangement, you can speak to your online tax agent for advice to ensure that it is the right choice for you.
Employers can offer salary sacrifice arrangements
Employers in Australia can offer salary sacrifice arrangements to their employees to attract and retain staff. It is a mutually beneficial arrangement for both the employer and the employee. Employers can offer non-cash benefits to employees at a lower cost than if they were to offer the same benefits in cash and employees can increase their take-home pay.
Concessional contribution cap
There are limits on the amount of superannuation contributions that can be made on a concessional (before-tax) basis. The concessional contribution cap for the 2022-2023 financial year is $27,500. This means that employees cannot salary sacrifice more than $27,500 of their salary into their superannuation account on a concessional basis.
If an employee exceeds the concessional contribution cap, they may be subject to extra taxes. It is crucial to be aware of the concessional contribution cap and consult with a professional before entering a salary sacrifice arrangement.
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