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How does salary sacrificing work?

At first glance salary sacrificing might seem like a strange concept. After all, you work hard for the money, why on earth would you want to sacrifice any of it? Well despite that counter-intuitive name, salary sacrificing makes a lot of sense. It's all about giving up a little of your pre-tax income to keep more in your pocket each payday.

So what exactly is it and how does it help your budgeting? In brief, it's an agreement between you and your employer, who agrees to pay for some of the goods and services you need from your pay before the tax comes out of it. In effect you're trading off (or "sacrificing") cash for the goods and services you need. By doing that you're reducing your taxable income. Ideally you may even be dropped into a lower tax bracket. Either way you're paying less tax and keeping more to yourself than you would have had you been paying for those same things from your pay after it had been taxed.

What can you salary sacrifice?

It goes without saying that more money in your pocket is great for your budget. Lots of things can be salary packaged, according to the Government's own Money Smart website, including computers, cars, childcare, home loans and health insurance. Those things are then subject to Fringe Benefits Tax (FBT), which your employer pays and which may affect your Medicare levy surcharge, tax offsets, child support payments and other government benefits come tax time.

One thing that isn't subject to FBT is superannuation contributions. That makes it one of the most effective things to salary sacrifice because the only tax it's subject to is the 15% contributions tax. It's a great way to save for your retirement, though you can't shovel endless amounts of money into that super account before it’s taxed at more than 15%.

What has changed this year 2017 - Saving for a first home

Talking of super, one new federal government budget initiative is that people saving for a first home can now salary sacrifice up to $30,000 into their superannuation (up to $15,000 per year) and put it towards a home deposit. Saving for a home is never easy, but that's one government measure that will be warmly welcomed by many. It's also administratively straightforward.

The things you can and can't include in your salary packaging arrangement will depend on your employer and the industry you work in. It's the same story with the total amount you can salary sacrifice (known as the FBT limit, cap or threshold). That's also determined by your employer and industry.

Novated lease

One of the best things to include in any salary sacrifice package is a new or used car through a novated lease. Here the total cost of owning a car – the purchase price, licencing, insurance, servicing and maintenance all come out of your pre-tax income. For many people it's far and away the best way to own the vehicle of their choice.

Tax matters are seldom straightforward, so it's always a good idea to discuss salary packaging with your accountant before embarking on it. And if you're thinking of a novated lease for your next vehicle, then it makes sense to speak to the experts at Fleetcare on 134 333.

Need more information about what to expect at the end of your Fleetcare Novated Lease?

Written by
Mark Schneider

Mark is a successful copywriter with over 20 years of professional writing experience.

We welcome him as a guest blogger to Fleettorque.

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