What’s a salary sacrifice?

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Wage sacrifice and wage packing are more commonly used terms in the UK and Australia and refer to an employment arrangement between employer and employee. People in the US or Canada may have similar agreements. Indeed, employers, instead of a certain share of the salary, can get a lot of perks or paid expenses.

In a basic agreement involving salary sacrifice, an employee gives up part of his salary in order to receive certain benefits from his employer. These may be called fringe benefits and may include items such as cars, computers, housing or contributions to retirement accounts. Depending on the country in which this occurs, this could result in paying an employee who is taxed at a lower rate. A lot depends on how the wage sacrifice is written and what types of benefits are offered to the employee.

In the US, you will see examples of wage sacrifice, especially among people working in on-call situations where, in addition to salary, they also receive room and board. Room and board may not be considered taxable, depending on the specific work situation. Another form of wage sacrifice in the US is given to people on active duty in the armed forces. They can receive free housing if they live on base, or they can receive a housing allowance that is really not part of their salary, and this housing can include accommodation for spouses and children. Alternatively, the low rate of pay in the military could mean the opportunity to go to college for reduced rates later on.

In other countries, salary packaging is a formal agreement between employee and employer where a person earns a certain salary and gives up part of it in order to receive certain fringe benefits. Again, these benefits may or may not be considered taxable. Things like computers or cell phones may not be considered part of a person’s salary, lowering the general tax rate, but larger or more expensive items such as large investments, cars or houses will likely be considered part of the salary.

Economic advisers suggest reading pay sacrifice agreements carefully, and many experts suggest consulting a lawyer before you agree to one. The main difficulty people may encounter when making these arrangements is the rate at which given items rather than wages are priced. Some companies overvalue these benefits, resulting in higher than necessary salary deductions. In other words, wage sacrifice can mean overpaying for things you could get cheaper if you had your full paycheck and purchased those things yourself.

With a good attorney or employee attorney, you will be able to lower the sacrificed pay amount through negotiation. This is not always possible. Some employers, such as the US military, have set inflexible pay rates.

In other circumstances, if you propose to be a nanny, for example, you need to determine whether child support and child support really represent appropriate financial compensation in addition to salary. With companies offering salary sacrifices as an option, you can weigh the potential tax benefits of earning a lower salary against the income benefits that would come from maintaining a full salary. Also, consider whether what the company is offering as part of your salary is being estimated at an appropriate cost or represents a true sacrifice on your part that reduces your income.

Asset Smart.

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