There’s a lot of confusion around salary sacrificing, what it is, and how it earns you more money when used wisely. While the term “salary sacrificing” might not sound appealing, it can actually help reduce your taxable income, meaning you pay less later on.
There are a lot of benefits to salary sacrificing, and you can apply this money in a number of beneficial ways. However, not many people are familiar with how to make this option work for them and their financial goals.
In this guide, we’ll explore how salary sacrificing can earn you more money. It sounds complicated, but it’s easier than you think with a bit of know-how.
What Is Salary Sacrificing?
In basic terms, a salary sacrifice is when you agree to earn less income before tax. In return, your employer provides benefits of similar value. This not only enables you to achieve some unique benefits, but it also lowers your pre-tax salary.
How exactly does this work in practice? Let’s say you earn $80,000 each year in income. You might agree to receive only $60,000 in exchange for a $20,000 car as a benefit. This is just one example of the types of benefits you might be eligible for, but you can see how it could work out in your favor.
Using this same example, your taxable income is now $60,000 vs. $80,000 which could actually lower your income. As far as the tax office is concerned, you earned less. This process is also sometimes called salary packaging or total remuneration packaging. While not always an option, it can be worth considering since it can—in theory—earn you more money.
What Benefits Can You Salary Sacrifice?
So what exactly can you “earn” by salary sacrificing? According to the Australian Tax Office (ATO), there aren’t really any restrictions on these benefits. However, they need to form part of your remuneration. These are called fringe benefits, exempt benefits, and superannuation.
Not all employers allow salary sacrificing for other benefits, but some do. Most will allow employees to sacrifice their income into their super. In general, these are the most common types of benefits:
- Fringe Benefits – Fringe benefits include cars, property (goods, land, buildings, bonds, shares), expense payments (childcare, school fees, utility fees), entertainment, gym memberships, etc. All of these benefits require your employer to pay fringe benefit tax unless they fall under an exemption.
- Exempt benefits – These benefits don’t require an additional tax for your employer. They can only be used for work-related expenses like electronic devices, computer software, protective clothing, tools, and so on.
- Super – You can also reduce your take-home income to put more money into your super or retirement fund. This is on top of what your employer already pays into your super which is no less than 9.5% of your gross salary. Salary sacrificing your super qualifies these contributions as employer contributions, not employee contributions.
- Mortgage – It’s also possible to sacrifice your salary for your mortgage in some industries. This is usually only true for charity, health, and non-profit industries with specific types of home loans.
- Cars – Finally, you can also salary sacrifice a car by using a certain type of lease known as a novated lease. This is a contract between you, a financial provider, and your employee.
If you see all of the benefits, it’s easy to understand why salary sacrificing can be a good fit depending on your situation. While you shouldn’t use it to afford things you don’t need, it can help with existing payments while also lowering your tax burden. This might be a great way to save and earn at the same time.
This process of giving up some of your income for other benefits is generally most beneficial to those in middle to high income ranges. These are the ones who benefit the most from the tax savings and can afford the cut to their income.
However, like all things, salary sacrificing isn’t right for everyone. If you’re in a lower tax bracket, there might be little to no tax savings. Either way, it’s worth consulting a financial professional before agreeing to a salary sacrifice.
Is Salary Sacrificing Right for You?
Salary sacrificing sounds intimidating, but it can be a powerful way to lower your tax bill while saving or getting a worthwhile benefit. While your particular situation depends on your employer and income, it’s something you might want to consider based on your long-term financial goals.
Like all decisions about money, you don’t have to make any tough choices alone. Talking to a financial expert about the right next steps to take in terms of your income, sacrificing, and budgeting is the best way to make sure you’re on the right track. Contact our skilled professionals at Debt Busters today to get started. We’re always here to help.