What if we tell you that you can sacrifice your salary and save money? A bit hard to believe, isn’t it? But, that’s actually a thing! Salary Sacrifice is an option through which you can bring down your taxable value. And we all know; lower taxable income means lower income tax. So how exactly does this work? Who can take benefit of salary sacrifice? Time to find out!
What Is Salary Sacrifice?
The salary sacrifice process is where you allow the employer to reduce your take-home pay in exchange for receiving certain benefits. It is also known as salary packaging. These benefits are paid from your pre-tax income. This means you could potentially lower your taxable income and save on taxes.
The Pain of High Taxes
Here’s the reality: if you’re earning over $45,000 a year, you’re likely paying at least 32.5% in income tax. For those in higher brackets, it can go up to 45%. That’s a significant amount of your income going to the ATO.
Salary sacrifice can help you cut that down. Instead of paying tax on your full salary, a portion is diverted to benefits that aren’t taxed as heavily.
How Does It Work?
Let’s say you earn $80,000 per year. Without any salary sacrifice, you’d be paying around $17,547 in taxes, leaving you with roughly $62,453 in take-home pay.
Now, if you sacrifice $10,000 of that salary toward superannuation or a novated lease on a car, your taxable income drops to $70,000. You now pay $14,697 in tax, leaving you with $55,303 in take-home pay plus the $10,000 benefit.
While your immediate pay might look lower, you gain significantly in terms of the benefits you receive and the taxes you avoid.
Common Salary Sacrifice Options
- Superannuation Contributions
Many Australians use salary sacrifice to boost their retirement savings. Since super contributions are taxed at a flat 15%, this can be more tax-effective than taking the money as a salary, especially if you’re in a higher tax bracket.
- Cars (Novated Lease)
If you need a new car, you can do so via salary sacrificing through a novated lease. This can save you thousands in taxes. It will be a three-way agreement between you, your employer, and a car leasing company. Here, you will pay for the car and running costs before tax. This will bring down your taxable income considerably.
- Work-Related Items
Let’s say you are working for a business that demands certain equipment. You can salary sacrifice these items. Here, the cost of these items will be deducted from your pre-tax income. Result? Your taxable income goes down, and you save more taxes.
- Childcare or School Fees
This is not quite common. But certain employers do offer salary sacrifice agreements to their employees for schooling or childcare. If your employer is willing to do so, this can help you a lot in bringing down your taxes.
What Should You Know Before Getting Salary Sacrifice?
Salary Sacrifice is an excellent strategy for reducing tax liability. But you will have to consider a few points before going ahead with it.
- Impact on Government Benefits
When you lower your taxable income, it might affect your means-tested benefits. For e.g., your Family Tax Benefits or Child Support Payments might go down. As we all know, the lower your reported income, the less you may be entitled to receive.
- Super Contributions Cap
From 1 July 2024, the concessional contributions cap will be $30,000 per year. If you exceed this cap, the excess will be taxed at your marginal rate, so plan your salary sacrifice to avoid this.
What You Can’t Sacrifice?
Salary sacrifice doesn’t apply to all forms of income. For instance, you can’t sacrifice bonuses. Similarly, you cannot sacrifice your leave entitlements, or income you’ve already earned. You have to make arrangements only on the future income.
Why Salary Sacrifice Isn’t for Everyone?
While salary sacrifice can offer great tax benefits, it’s not ideal for everyone. If you’re on a low income (under $37,000), you might not save much after factoring in other benefits you receive. People on middle and high incomes tend to benefit the most from salary packaging.
Also, some employers charge additional administration fees to manage salary sacrifices. So when you take these charges into account, the overall savings can be much less. So, salary sacrifice does not make any sense in this case. So it’s very important to consult with an expert like Nanak Accountants to determine whether to use salary sacrifice or not.
The Numbers Don’t Lie
Let’s break down some numbers for you:
- If you earn $90,000 annually and salary sacrifice $15,000 into super, your taxable income drops to $75,000. This could reduce your tax bill by around $5,025. At the same time, it will grow your super at a reduced tax rate of 15%.
- You can avoid paying GST on purchasing and running costs of a car if you use a novated lease. It will allow you to sacrifice $12,000 for a car, and your taxable income drops. Over three years, this could save you up to $5,000 in taxes and GST.
<h2> Is Salary Sacrifice Right for You? </h2>
We already mentioned that salary sacrifice is not an ideal option for all. So before signing any salary sacrifice agreement, it’s critical to ask yourself:
- What are your long-term financial goals?
If you’re looking to boost your retirement savings, salary sacrifice into super could be a no-brainer. But if you need immediate cash flow, it might not be the best option.
- Can your employer offer the benefits you want?
Not all employers allow salary sacrifice for everything. Some only offer super contributions, while others might include novated leases or work-related items.
- Are you aware of the concessional contribution caps?
If you are exceeding the super cap, it can result in penalties. This will negate some of your tax savings. So here, salary sacrifice does not any make sense.
Wrapping Up
Salary sacrifice is an excellent if you want to reduce your tax burden. You can grow your retirement savings or even get a new car and reduce your tax burden alongside. But as we mentioned earlier, this comes with certain regulations. So, talk to our professionals today to find out whether it’s the right choice for you or not.