What is salary sacrificing?

Chances are you've heard the term 'salary sacrificing'. But do you understand what it means? It can be a fantastic strategy for you to minimise tax and is a great addition to your employment package.

Sometimes referred to as ‘salary packaging', it is an agreement between you and your employer where they will pay for a range of goods or services as part of your income, instead of cash. It's a great way to minimise tax, because the amount you choose to sacrifice comes out of your pre-tax salary therefore reducing your taxable income. 

There are a few rules, but the two most important ones are:

1. What you can sacrifice will depend on your employer size and industry but it's most commonly used for superannuation, electronic devices (like laptops and phones) and cars.

2. The salary sacrifice agreement must be made in advance. You can't sacrifice money that has already been paid. However, when it comes to superannuation there are different rules.

How salary sacrifice works with superannuation

If you're wanting to boost your retirement savings or want to use your super to buy a house - salary sacrificing can be a great option.  

Before-tax contributions are taxed at 15% which is considerably lower than the tax rate of the average income earner, currently at 32.5%.

This is a great option for First home buyers, as they can withdraw up to $30,000 in voluntary super contributions, to put towards their first home.

Naturally there are terms and conditions attached to this and if you don't end up using the money for your first home then you will have to pay an additional tax to access the money or wait until you have retired.

Salary sacrificing a car

The most common way to salary sacrifice a car is using the novated lease. This is where you lease a car and your employer takes the repayments and running costs out of your pre-tax income.

This can be a great option if you are planning on buying a car but it's important to seek financial advice before going ahead. There are a lot of ways it could end up being more of an expense than a saving if you don't do it right.

Let Building Blocks Financial Planning talk you through your options

While there can be benefits to salary sacrificing, it is essential you get professional advice before entering into any agreements. Our Building Blocks Financial Planning team can help you understand your salary sacrificing options. We offer a complimentary first appointment with our expert financial adviser.