Salary Sacrifice, why would you do it?

Lately salary sacrifice has come up in a few conversations that
I have had and it was used in the wrong context. It is almost like some people use the term as a throwaway line not knowing what it truly means.

So, here is my salary sacrifice 101 for those of you who don’t know, for those of you who think you know, and for those of you who are missing out by not knowing.

Salary sacrifice is the process of forfeiting some of your take home pay for another purpose or expense. This may include: Superannuation, car leases, computers, utility bills, education expenses, loans and even different investments.

It would be great if we could salary sacrifice every expense but unfortunately it doesn’t work that way.

Why would you do this? Well, when you salary sacrifice, you are redirecting some of your salary to pay or invest in something else. This is done BEFORE your income tax is taken out of your salary.

That is the ultimate benefit and it has a flow on effect. You can obviously pay for your own things, but if you salary sacrifice it, you get to pay for these expenses before tax has been calculated and taken out of your take home pay. That means that whatever is left once the salary sacrifice has been done
will then be taxed, meaning you end up paying less tax overall.

I’ll give you a little example.

Your weekly salary (pretax) – $1,000

Your tax rate – 32.5%

You are leasing a car for $100 a week

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Scenario 1 – No salary sacrifice arrangement

Weekly Salary:      $1,000

-Less Tax:             -$173.21

= Tax home pay:   $826.79

-Less Car Lease:   -$100

Remaining Pay:    $726.79

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Scenario 2 – Salary sacrifice arrangement

Weekly Salary:              $1,000

-Less Salary Sacrifice:  $100

= Remaining Salary:     $900

-Less Tax:                    $137.71

Remaining Pay:          $762.29

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The result? Well you still have the car lease, but you pay less tax, and your take home pay at the end of the week is higher. You have the same outcome but the way in which you structure it is more beneficial to your bottom line. See what I am getting at here?

More often than not, most employers are referring to salary sacrificing some of your take home pay into
superannuation to save for your retirement, but it’s always good to ask what your company policies are around salary sacrificing other expenses.

In our example above, just by structuring this lease payment in a different way, you would take home an extra $1,846 a year. For the lucky person above, that’s like getting an extra 2 weeks pay for nothing.

Many Government and healthcare departments offer pretty good salary sacrifice arrangements so make sure to ask the question if you work within these sectors. For those of you who work for not-for-profits, you have the best deal of them all. You may be able to salary sacrifice up to $14,529 worth of your salary for a variety of everyday expenses. That will save you a lot in tax!

If you are considering getting a car lease or purchasing a new computer, it might be worth enquiring with your employer as to the arrangements available and doing the maths. Paying less tax is one
thing, but having more money in your wallet at the end of the week is the icing on the cake.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Financial Planning and Cara Brett