The Pros and Cons of Salary Sacrificing

The Pros and Cons of Salary Sacrificing

Salary Sacrificing (also known as salary packaging) can be a massive boost to your end-of-tax-year earnings by reducing how much you bring home each week, but is it right for you? Here are some of the pros and cons of salary sacrificing, to help you reach the right decision.

It is important to note here that this article contains general information only and should not be relied on as financial advice. You should obtain specific, independent financial professional advice before entering a salary sacrifice arrangement or speak to a reliable taxation specialist.

What is Salary Sacrificing?

What is Salary Sacrificing?

Salary sacrificing, also called salary packaging, is basically a way to reduce how much tax you need to pay on an annual basis. To do this, you can arrange an agreement with your employer to reduce how much money you take home every week and the rest of your usual wage can be added to your superannuation as voluntary contributions, or used to purchase things like laptops and phones and cars.

This works because if you’re earning less, you pay less tax.  The rules and regulations regarding salary sacrificing can be confusing as they get quite technical. Never enter into a salary package agreement without fully understanding the implications for your individual circumstances. Also, many small businesses don’t offer salary sacrificing services, so check with your employer what is available.

Is Salary Sacrificing Worth It?

Salary sacrificing may sound like a scary term, but the long-term benefits can be very worthwhile. When you choose to salary sacrifice, you only have to pay 15% tax on that portion of your income, instead of the usual tax rate. It also can reduce the threshold on the portion that you are taking home

Keep in mind, if your personal income tax rate is below 15%, there is generally no benefit in salary sacrificing other than adding the portion sacrificed as a locked away superannuation funds – it would be taxed at 15%, which is a higher rate than your personal income tax rate of 0% for earnings under $18,200.

There are also limits to follow. The contributions’ cap means that you can up to $25,000 per annum following the Fringe Benefits Tax year, which runs from 1st April to 31st of March. Especially since this doesn’t align with the tax year of July-June, you need to track your contributions carefully.

Use Salary Sacrificing to Boost Your Superannuation or Buy a House

Salary sacrificing can be an enormous boost to the savings of first home buyers, who can withdraw up to $30,000 in voluntary super contributions to put towards their first home. Since superannuation contributions are taxed at only 15%, the savings are clear when compared to 32.5% for earnings from $45,001 up to $120,000.

What Are Some of The Pros of Salary Packaging

What Are Some of The Pros of Salary Packaging?

Some of the financial benefits for middle to upper income earners are clear, but there are some other added pros of arranging a salary package deal with your employer and it is important to speak with a detailed, reputable taxation specialist, such as LeVeon to find out what is best for you.

  • Increased pension at retirement – boosting your superannuation can have an enormous effect on the lifestyle you can afford when you retire.
  • Access to services – arrangements can be made for packages to include access to things like childcare, gym memberships and healthcare.
  • Can be used to buy items – laptops, phones, cars, or even a house.
  • Less tax paid – organising to receive less of your wage in the short term can mean thousands of dollars difference.
  • Reduced insurance costs – life insurance is usually included in superannuation accounts. The premiums may be tax-deductible as well.
  • Reduced investment earnings tax – salary sacrificed funds into super will be invested to increase its value. All earnings resulting from investments within a superannuation account are taxed only at a maximum of 15%, a reduction from Capital Gains Tax.
What are some of the Cons of Salary Sacrificing

What are some of the Cons of Salary Sacrificing?

It is important to note that salary sacrificing, or packaging, also has its disadvantages.

  • Not covering expenses – part time workers or low-wage earners will be unlikely to benefit, as they will bring home less wage which may not cover the cost of living. Receiving less pay may mean a shortfall on necessities such as rent, food and entertainment budgets.
  • Additional administrative work – your employer may not even offer packaging deals, since it can create extra workloads for payroll team.
  • Changeability – especially true in today’s financial landscape, the rules and regulations around salary sacrificing are subject to change
  • Tax rate minimums – if you’re not earning above a certain rate, then your additional contributions to your super will be taxed at a higher rate than your earnings, leaving you out of pocket.
  • Locked up finances – superannuation is not a savings account. There are very few circumstances that an individual can access the funds prior to retirement.
  • Fees – Super funds charge fees and will increase the fee based on the balance.
How Much Could I Save by Salary Sacrificing

How Much Could I Save by Salary Sacrificing?

Sometimes it can be easier to understand the benefits of salary sacrificing by seeing the actual numbers. For this example, we assume the individual has no spouse, earning a pre-tax wage of $100,000 AUD and has an arrangement with the employer to package his wage to make voluntary contributions to the individual’s superannuation fund of $15,000 a year (based on tax figures 2019-2020).

Salary Sacrificing

Choose LeVeon To Help You Find out If Salary Sacrificing Is Right for You

“Is salary sacrificing right for me?”, well, the ups and downs of salary sacrificing arrangements can make it a difficult decision as to what arrangements you should make. You also need to consider what might happen if your circumstances change, like if you lost your job. Also, salary sacrificing can reduce an employer’s minimum superannuation contribution.

LeVeon have experienced, professional taxation specialists, who can work out the details of your specific financial arrangements. To gain certainty around your future, don’t hesitate to call LeVeon on 0488 008 259 or email to arrange an appointment so that we can help you reach your personal and financial goals.