The employee pays income tax on the reduced salary or wage. Salary sacrificed (pre-tax) superannuation contributions are classified as employer contributions (not employee contributions). The employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided.
Many companies offer both options within their employee benefits package, but it's sometimes not clear what the
difference is. Make sure you're
in the know before you commit to anything.
Salary deduction vs salary sacrifice - What's the difference?
| Salary Sacrifice | Salary Deduction |
|---|
| Makes a difference to your total salary | Doesn't make a difference to your total salary |
'Salary sacrifice' (also called 'salary exchange') is an arrangement employers may make available to employees – the employee agrees to reduce their earnings by an amount equal to the employee's pension contributions. Using salary sacrifice means that the employee and employer pay less National Insurance contributions.
Salary sacrifice is a contribution you make to your super from your before-tax pay. Salary sacrifice reduces your taxable income, so you pay less income tax. Only 15% tax is deducted from your salary sacrifice amount compared to the rate you pay on your income, which can be up to 47% (including the Medicare Levy).
Here's one of the most cost-effective and tax-effective ways for an ordinary mortal on a salary to own a new car. Novated leasing - also called 'salary sacrifice' - makes real sense for a lot of employees. It's often the best way to own a new car. You can even do it on late-model used cars.
Put simply, it's a 'yes'. Salary packaging / salary sacrifice is an arrangement whereby you only pay income tax on your reduced salary – that is, the amount left over in your pay packet after your agreed benefit(s) have been deducted.
Are there limits to how much I can contribute? Yes. If you want to claim a tax deduction, the maximum that can be paid into your super account each year (including any salary sacrifice and the super your employer pays you) is $25,000.
The short answer is, if you go over your concessional contributions cap, the excess amount is included in the amount of assessable income in your tax return and you pay tax on it at your marginal tax rate.
Once you contribute money to your super you generally can't access it again until you retire. If you'll need the money before you retire, paying off your mortgage is a better option because you may be able to redraw the money or access the equity in your home.
Income Tax rates and bands
| Band | Taxable income | Tax rate |
|---|
| Personal Allowance | Up to £12,500 | 0% |
| Basic rate | £12,501 to £50,000 | 20% |
| Higher rate | £50,001 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
Salary sacrifice is an arrangement with your employer to forego part of your salary or wages in return for your employer providing benefits of a similar value. One example of a salary sacrifice arrangement is to have some of your salary or wages paid into your super fund instead of to you.
An employee can 'sacrifice' part of their salary or wages into super contributions under an agreement with you. You then pay the sacrificed amount to your employee's super fund on their behalf. the contributions are tax deductible.
15 Legal Secrets to Reducing Your Taxes
- Contribute to a Retirement Account.
- Open a Health Savings Account.
- Use Your Side Hustle to Claim Business Deductions.
- Claim a Home Office Deduction.
- Write Off Business Travel Expenses, Even While on Vacation.
- Deduct Half Your Self-Employment Taxes.
- Get a Credit for Higher Education.
Imagine you earn $80,000 and decide to salary sacrifice $10,000 to super. You would pay $1,500 in tax on that $10,000 in super compared to $3,450 you would have to pay otherwise — a saving of $1,950.
If you are applying for a home loan, lenders may count your salary sacrifices as an expense. This can significantly reduce how much they will let you borrow. For example, if you are using salary sacrificing to pay car payments, you can't just stop paying this. A lender will consider this to be an expense.
Salary packaging should not impact your Centrelink entitlements (compared to someone not salary packaging). This is because Centrelink will assess you on the 'cash' (net) value of salary packaging, not the grossed-up value.
When an employee opts for a salary sacrifice scheme rather than a Net Pay Scheme they sacrifice part of their gross income for a corresponding pension contribution paid by the employer. This means that if employees are contributing to a pension, they will stop the contributions and the employer will pay them instead.
Using salary sacrifice means that the employee and the employer pay less National Insurance contributions. Employers may decide to maximise the amount of pension contributions by adding the savings they make in lower employer National Insurance contributions to the total pension contribution amount they pay.
A salary sacrifice arrangement means that your pay is restructured so that you agree to a reduction in your taxable salary and receive a new benefit from your employer, e.g. a lease car or childcare vouchers. All salary sacrifices reduce your pensionable pay and so can have an effect on your pension.
