Thinking of salary sacrificing? Here’s why you should, or shouldn’t

Recently, a reader emailed me asking if I could take the time to explain salary sacrificing and novated leasing, saying they didn’t really get it, and it “felt like a scam”. And you know what, fair enough.

By and large, your pay is a pretty easy thing to grasp: you have a salary, some of it goes to superannuation, some of it goes to tax, the rest goes into your pocket. You can get a pay rise, which will increase the amount that goes into those three respective zones, and ... that’s about it.

Salary sacrificing involves foregoing part of your take-home salary for benefits such as a car or higher superannuation contributions.Credit: Aresna Villanueva

But when salary sacrificing enters the picture, this whole equation gets a bit wonky. In short, salary sacrificing is where you give up some of your take-home pay in exchange for either various benefits from your employer (such as a car, phone, or laptop) or to increase the amount of money you put into super. This comes out of your pre-tax salary, and so reduces the amount of tax you have to pay.

What’s the problem?

Unfortunately, although salary sacrificing usually means a net benefit for both the employer and employee, it’s pretty unpopular − only around 10-15 per cent of working Australians opt for it. And, yes, while a small business might not offer salary sacrificing to its employees, the majority of medium-to-large businesses do.

What you can do about it

So if you’re also of the opinion salary sacrificing sounds like a “scam”, let me try and demystify it:

• Why would you salary sacrifice? When used strategically, salary sacrificing can have a huge benefit for employees, not just because of the tax savings, but because it can allow you to save money over the long-term. However, Kate Leaman, finance expert and chief market analyst at AvaTrade, warns that not all salary sacrificing arrangements are made equal, so workers should think carefully about the pros and cons before signing on. “Those that offer the most value are ones that have clear, measurable benefits both now and later,” she says. Examples of these include sacrificing take-home pay for additional superannuation payments (which Leaman labels a “clear winner” − because super contributions are taxed at just 15 per cent, rather than at your marginal tax rate), along with novated car leases, which let you pay for a car and its running costs via your pre-tax salary. “These arrangements allow employees to make the most of their pre-tax income, enabling them to upgrade their lifestyle and invest in their future,” Leaman says.
• What should you be wary of? The primary concern when it comes to salary sacrificing is the reduction of your take home pay. While you may be getting some great other benefits, all of that means squat if your pay drops to a level where you start to struggle to afford bills/groceries/rent – something that can be easy to overlook. Leaman says it’s also important to remember if you reduce your take home pay through salary sacrificing, you will continue to get that lesser amount when on sick leave and holidays. Negotiations concerning salary sacrificing can be complex, so it’s best to ensure you’ve got a clear idea of what you’re agreeing to before you sign up.
• When does salary sacrificing not make sense? As financial advisor Cara Williams says: “Just because something saves tax doesn’t mean it’s the right decision.” Many workers can get sucked into the allure of salary sacrificing to get a shiny new car or laptop, and fail to think critically about what it may mean logistically (and, admittedly, many workplaces push salary sacrificing onto employees when it may not really make sense). Williams says it’s important to analyse your options methodically, especially in the case of novated leases, where a personal loan (or not getting a car at all) might suit you better. “If the bundled costs in a novated lease exceed what you’d normally spend, you don’t plan to drive much, or you don’t actually need to purchase a vehicle, it may not deliver value, even if it saves some tax,” she says. “Salary packaging can be beneficial in some situations, but it’s essential to understand the full picture, including costs, obligations, and how it fits into your broader financial life.”

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. You should always seek professional advice that takes into account you own personal circumstances before making any financial decisions.