Remuneration packages play an important role – and these include the option of salary sacrifice. Salary sacrifice arrangements can benefit employers and employees by tailoring remuneration packages to individual needs while potentially creating tax efficiencies for employees and improving employee satisfaction.

What is salary sacrifice?

Salary sacrifice is an arrangement where employees agree to forgo a portion of their pre-tax salary in exchange for benefits of equivalent value. The sacrificed amount reduces the employee’s taxable income and the benefit is funded directly by the employer. These arrangements can enhance overall remuneration packages without increasing costs for employers.

How salary sacrifice works in New Zealand

The employee and employer enter into a formal agreement in which the employee sacrifices part of their salary in exchange for a specific benefit. The value of the benefit is deducted before PAYE is calculated, meaning the employee pays tax on a reduced taxable income. The employer then provides the agreed benefit directly, such as paying for a car park, making additional KiwiSaver contributions (which are then taxed via ESCT), or covering telephone or public transport costs.

For example, an employee is paid $80,000 per annum, the employee agrees to salary sacrifice a portion of their salary for a car park costing $5,000 per year (GST not included to keep matters simple). Result: The employee gets a carpark without paying the income tax they would have if they had been paid the $5,000 in after-tax cash, per the tables below. 

Advantages of salary sacrifice

In addition to the points above, salary sacrifice gives employers greater flexibility when structuring remuneration packages. It can also assist during remuneration negotiations by allowing employers to offer additional value to employees without significantly increasing salary costs.

Providing benefits that support employees’ work-related or lifestyle needs can improve job satisfaction and strengthen staff loyalty. This may reduce employee turnover while also helping employees feel more valued and supported in the workplace.

A positive and supportive work environment can also contribute to improved productivity and overall workplace culture.

Tax implications of salary sacrifice arrangements

Fringe Benefit Tax (FBT)

Professional advice should be sought before introducing salary sacrifice arrangements, as some benefits may be subject to FBT. It is important to carefully assess which benefits are suitable for inclusion in a remuneration package to avoid unintended tax consequences or unnecessary compliance costs.

Government benefits

Reducing an employee’s taxable income may affect their eligibility for certain government benefits or entitlements. Employers should ensure employees fully understand the implications of entering into a salary sacrifice arrangement before any agreement is finalised.

Administrative considerations

Salary sacrifice arrangements must be mutually agreed upon, and any changes to employment terms should be documented and signed by both parties. It is important to ensure employees understand the arrangement, including any trade-offs involved, before agreeing to participate.

Accurately calculating taxable income for payroll reporting purposes is extremely important, as salary sacrifice arrangements involve payroll adjustments. Employers should seek guidance from an accountant or payroll specialist to ensure compliance requirements are met.

Should your business offer salary sacrifice to employees?

When carefully planned and managed, salary sacrifice arrangements can create advantages for both employers and employees. However, employers should fully understand the benefits being offered, along with the associated tax and compliance obligations, before implementing these arrangements.

If you have any questions about salary sacrifice, contact your Baker Tilly Staples Rodway advisor. Our highly qualified and experienced specialists are ready to help you.