Salary Sacrifice Explained

Salary sacrifice is a method of lowering the amount of tax you pay. It entails utilising pre-tax earnings to purchase items or services that one would typically purchase with after-tax earnings. BluCity Tax is a vibrant, well-established Tax and Accounting firm that specialises in accounting and taxes advice for affluent Australians.

Because earning less in the perspective of the tax agency while one is salary sacrificing, they are taxed less.

A salary sacrifice plan may often contain a variety of perks, including superannuation, exempt benefits, and fringe benefits. The majority of firms let employee’s salary sacrifice into super; however, not all employers permit salary sacrifice into other perks.

Another prominent usage of salary sacrifice is for motor vehicles and other operating costs.

A novated lease is the most prevalent type of agreement. It works like this: one leases a car, and the employer deducts the payments and operating expenses from pre-tax income.

However, many employees make the mistake of focusing on the tax break rather than the whole expense. Another consideration is that one must pay a flat fee to keep the motor vehilce at the conclusion of a novated lease.

Many perks are excluded from the tax on fringe benefits, even though the company is not normally exempt from paying the tax on fringe benefits. These are known as exempt benefits, although they only apply to work-related purposes.

Salary sacrifices into super decreases the take-home income and helps to save more for retirement. Salary Sacrificing the House

If they are exempt from Fringe Benefits Tax, those in the not-for-profit, health, and charitable industries will allow salary sacrifices for mortgage payments. A novated lease is a contract entered into between an employer and a lender. When one signs this agreement, the employer will make payments to the third-party lender on their behalf.

Mortgage payments can be salary sacrificed in the charitable, health, and not-for-profit industries, but only for owner-occupier loans. Salary sacrifice is not permitted for investment loans. The next step is to inquire with the lender about salary sacrifice, as not all lenders will enable salary sacrifice in mortgage payments. Salary sacrificing the mortgage payments can significantly reduce taxable income, perhaps resulting in large tax savings. Such tax savings might be used to make additional repayments, which could help to save significantly on interest charges.

The first possibility is that the company will just refuse to do it because they believe it would be too difficult or costly to put up. They may also place a yearly restriction on how much one may salary sacrifice toward mortgage payments. Depending on how much this is, it may or may not be enough to contribute towards the house loan instalments.

Salary sacrifice is more favorable for middle-high income workers because low-income earners have little to no tax savings.

Salary sacrifice is often most successful for moderate to high-income workers, with little to no tax savings for those already in a low tax band.

If one makes a moderate to high income, salary sacrifice may be worth considering to decrease the taxable income and take advantage of some of those benefits.

Leave a Reply

Your email address will not be published.