Salary sacrifice how does it work

Print text only. Print Cancel. What is salary sacrificing and how does it work? The rules are complicated but there are two big things to keep in mind when starting out.

What you can salary sacrifice depends on your employer, but it's commonly used for superannuation, electronic devices like laptops and phones and cars. Whether you can take advantage of it at all depends on your workplace. Many small businesses don't offer salary sacrificing services, says Jarrod Rogers, a certified public accountant based in Melbourne.

Salary sacrificing arrangements must be made in advance. You can't package money you've already been paid. There is an exception for superannuation, which we'll get to shortly. See, that wasn't too hard! Now we can get to the money-saving part. Email address. Is it time to break up with your super provider? Here's what to consider before switching. The right amount to borrow for a home isn't necessarily what the bank tells you.

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Are you better off doing your taxes yourself? This is what to consider. Note: This example illustrates how salary sacrifice arrangements can work. It is not intended to be advice, whether legal or professional. You should not act solely on the information in this example. Specific advice should always be obtained from your financial adviser.

Show download pdf controls. Show print controls. Salary sacrifice arrangements for employees A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. On this page: Requirements for an effective salary sacrifice arrangement Types of benefits that can be included Implications of entering into an arrangement Requirements for an effective salary sacrifice arrangement You need to set up a salary sacrifice arrangement with your employer before you start the work.

Agreement between you and your employer It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. No access to sacrificed salary You must permanently forego the sacrificed salary for the period of your arrangement. Types of benefits that can be included There is no restriction on the types of benefits you can sacrifice. The types of benefits generally provided in salary sacrifice arrangements by employers include: fringe benefits exempt benefits super.

Fringe benefits Common fringe benefits include: cars property including goods, real property such as land and buildings, and shares or bonds expense payments such as the payment of your loan repayments, school fees, child care costs and home phone costs. Exempt benefits Several benefits are exempt from fringe benefits tax FBT.

The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits: a portable electronic device an item of computer software an item of protective clothing a briefcase a tool of trade.

The work-related items exemption is limited to: items primarily for work-related use one item per FBT year for items that have a substantially identical function, except if the item is a replacement item more than one work-related portable electronic device that small businesses provide employees in an FBT year — even if the devices have substantially identical functions. See also: Small business entity concessions — eligibility Super Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered employer contributions.

Implications of entering into an arrangement As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. For instance: You pay income tax on the reduced salary or wages. Your employer may be liable to pay FBT on the non-cash benefits provided. Your employer may be required to report certain benefits on your income statement or payment summary.

Your salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions. Your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you from 1 January See also: Accessing your income statement To check your award or agreement, contact the Fair Work Commission External Link Super guarantee Your salary sacrifice contribution is counted towards your employer contributions.

From 1 January , salary sacrificed super contributions will not: reduce the ordinary time earnings your employer is required to calculate your super entitlement on count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.

To check your conditions, contact the Fair Work Commission External Link Assessable income You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits.

Salary sacrificing a deductible expense If your employer pays for an expense, as part of your salary package, which you would normally get a tax deduction for, they will not have to pay FBT on this expense.

Example: Employer-paid expense An employer pays for the compulsory insurance of a death and disability scheme for their employees. Income tax deductions cannot be claimed where an expense has been paid by an employer. End of example.

Since April , employees have been required to pay tax and National Insurance on salary they give up under any other salary sacrifice schemes or flexible benefit schemes. Employees who enrolled in a car, accommodation or school fee salary sacrifice agreement before 6 April are protected until the end of the agreement, or 5 April — whichever is soonest.

If the benefits you receive are taxable, they may be recorded on your P11D form - this is submitted to HMRC by your employer each tax year. You should receive a copy of this by 6 July. While you may not save on tax under these other schemes, you're likely to benefit from cheaper corporate rates. You can also buy high-value items outright you might not otherwise be able to afford. Find out more: 35 ways to save on tax — a wealth of tips to save you even more money.

You can reduce your income tax and National Insurance NI contributions by giving up part of your salary and directing it to your pension instead. In the example shown, the employer would save on NI contributions and might be persuaded to add this saving to the pension contribution, boosting the amount paid towards your pension even more. This reflects the current auto-enrolment contributions.

Please note that the illustration above only shows the effects of income tax - National Insurance contributions will also be a factor. Some employers allow parents to exchange part of their salary for tax-free childcare vouchers - this scheme closed to new applicants in October , but existing claimants can continue to use the service for as long as their employer offers it, or until they change jobs.

If you fall under the scheme, you can choose your own childcare or nursery, but they must be state registered or Ofsted approved. You pass on the vouchers to your childcare provider. As an alternative to childcare vouchers, the government has introduced tax-free childcare. You can find out more about how these schemes compare in our guide: tax-free childcare and other ways to save. Many employers allow their employees to use Cycle To Work schemes to save money on the purchase of a bicycle.

You start by choosing the bike you want. The bike is bought by your employer, who then leases it to you. Many employers can reclaim the VAT and have the option of passing this saving on to you. Once the hire period ends, you can buy the bike from your employer at a 'fair market value' set by HMRC. This scheme also allows you to avoid tax and National Insurance on the part of your salary you sacrifice, resulting in significant savings.

Some employers offer flexible benefit packages, which allow employees to buy extra or different benefits from the ones the employer offers as standard. For example, you might choose to buy additional life insurance or critical-illness cover, or to extend benefits such as private health insurance or health screening to your partner. You can also choose to 'buy' additional holiday, or, if you prefer, give up holiday in return for extra cash.

These schemes are sometimes known as 'cafeteria benefits' or 'flex plans', as they allow employees to vary their pay and benefits package in order to suit their own personal requirements. You may be able to get benefits such as extra life insurance or critical-illness cover more cheaply by buying through your employer, as your employer is able to buy in bulk. Intangible benefits - including annual leave - can be purchased without needing to pay tax or National Insurance on that portion of your salary.

You should also check with your employer to make sure your bonuses, pay increases and pension benefits won't be affected. Salary sacrifice is unlikely to work for those on low incomes, as your take home salary is not allowed to fall below the national minimum wage. Depending on the benefit you receive, the payments you make may reduce your taxable income - meaning your payments are essentially tax-free.

This includes schemes for pensions, childcare, Cycle to Work, ultra-low emissions vehicles, retraining courses and intangible benefits. There are certain schemes, however, that you still have to pay PAYE on. Terms will vary between employers, but generally, you just have to make sure your take-home pay after salary sacrifice is more than the national minimum wage.

Keep in mind that only certain schemes will allow you to make the payments exclusive of tax and National Insurance.

No, a salary sacrifice agreement is only valid from the date the contract is drawn up between you and your employer.