What is Salary Packaging and What are the Benefits?
Getty Images
Salary Packaging, also known as Salary Sacrifice or Total Remuneration Packaging in Australia, is an arrangement where you and your employer agree that you will receive a lower pre-tax salary. In return, your employer covers certain benefits of equal or similar value, allowing you to pay less tax on your income.
This differs from your Super and Exempt benefits. Salary Packaging is typically used by individuals with middle to higher incomes, and the arrangement must be agreed upon with your employer before you receive your pay. The employer is responsible for paying Fringe Benefits Tax (FBT) on the value of the benefits provided.
In this article, we'll explain how salary packaging works, how it compares to the UK's salary sacrifice, and its benefits.
What is salary packaging?
Salary packaging is an arrangement where you and your employer agree to divide your salary into both income and benefits. This allows employees to use their pre-tax salary to cover expenses for benefits like a car, health insurance, and other agreed-upon perks.
If some of these benefits are considered fringe benefits, your employer is responsible for paying Fringe Benefits Tax (FBT) on their value. To offset this cost, your employer may ask you to contribute, which is one of the disadvantages of car salary packaging.
How does salary packaging work?
By reducing your taxable income, salary packaging helps lower the amount of tax you pay. This works similarly to the UK's salary sacrifice schemes, where employees use their gross salary to receive benefits such as leased cars, while reducing their taxable income.
Salary packaging can include a wide variety of benefits as long as they are part of your total compensation package, replacing the salary you would have otherwise received.
Common fringe benefits include:
Cars - with salary packaging for electric vehicles becoming more popular
Goods
Shares
Payments for loan repayments, school fees, and childcare costs.
Exempt benefits (which are not subject to FBT) include:
computer software
protective clothing
Portable electronic devices
Key Differences Between Salary Packaging (Australia) and Salary Sacrifice (UK)
While both salary packaging in Australia and salary sacrifice in the UK allow employees to reduce taxable income through pre-tax benefits, there are key differences in tax treatment, the scope of benefits, employer responsibilities, and common uses.
| Australian Salary Packaging | UK Salary Sacrifice | |
|---|---|---|
| Tax Treatment | One of the salary packaging benefits is the ability to use pre-tax earnings to pay for fringe benefits, such as cars and health insurance, reducing their taxable income and tax liability. However, the employer must pay FBT on these benefits, and they may ask the employee to contribute to the cost. | Salary sacrifice also reduces taxable income by using pre-tax earnings for benefits like pension contributions, childcare vouchers, or car leases. Salary sacrifice is often focused on pension contributions, where employees reduce their salary in exchange for employer contributions to their pension scheme. Unlike Australia, there is no FBT in the UK, but National Insurance contributions must still be considered. Salary sacrifice car schemes are becoming more common, helping employees save on car leases. |
| Scope of Benefits | Salary packaging offers a broader range of benefits, such as cars, health insurance, laptops, and superannuation contributions. It is often used by higher-income earners looking to reduce their taxable income. Salary packaging cars is a great way of lowering taxable income whilst receiving a competitive benefit. | Salary sacrifice tends to be more focused on specific benefits, like pension contributions, childcare vouchers, and cars. It is less flexible than salary packaging in terms of available benefits. |
| Employer Responsibilities | Employers are responsible for paying the FBT on fringe benefits. If FBT applies, they may ask employees to contribute to the tax cost. | There is no equivalent to FBT in the UK, but salary sacrifice arrangements typically require the employer to facilitate the scheme. |
Types of Salary Packages in Australia and UK Alternatives
A typical Australian compensation package will include base salary, pension contributions, healthcare benefits, paid time off (PTO), potential bonuses or incentives, and sometimes additional allowances like travel or housing depending on the role and company policy; with the option to sacrifice, or package a portion of the base salary to access certain benefits like company cars or childcare vouchers through a salary sacrifice scheme.
Key components of a standard salary package:
Base Salary: The fixed amount of money an employee receives for their work, forming the core of their earnings.
Pension Contribution: Employer contributions to an employee's retirement plan, often with the option for employee contributions as well. The minimum contribution is set by the superannuation (super) guarantee, with the option to contribute more.
Healthcare Benefits: Medical insurance coverage provided by the employer, potentially including dental and vision options.
Paid Time Off (PTO): Accrued vacation days, sick days, and potential personal days.
Bonuses and Incentives: Performance-based additional pay based on individual or team goals.
Salary Sacrifice Options (may vary based on company policy and location):
Company Car: Employees can "sacrifice" a portion of their salary to receive a company car with tax benefits.
Childcare Vouchers: Employees can use a part of their salary to access childcare services with tax advantages.
Gym Membership: Some employers offer the option to deduct gym membership fees from their salary.
Salary sacrifice options are typically customizable components within industry- or company-specific salary packages. For example, if a company offers company cars to employees as a standard benefit, employees are not required to accept the offer, though the benefit is available to them.
Before accepting employment, it’s important to review the contract and confirm which benefits (such as cars, vouchers, or memberships) are included.
In the UK, the typical salaried employee receives a base salary - with subsequent pension contributions, National Insurance contributions, PTO, bonuses and incentives, and allowances.
Salary sacrifice schemes are optional and often include private pension contributions. Many companies also offer benefits such as private healthcare, car salary sacrifice schemes, and other perks, which employees can choose to opt into.
What Are The Benefits Of UK Salary Sacrifice?
Canva
When discussing the pros and cons of salary sacrifice car schemes, the main benefit of salary sacrifice is the ability to pay less tax. By sacrificing part of their salary, the employee reduces their taxable income, which means both the employee and employer pay lower National Insurance contributions, and the employee pays less income tax.
What’s In It For The Employees?
Access to non-cash benefits - salary sacrifice allows employees to receive non-cash benefits, some of which they may not have been able to afford otherwise, like an electric car scheme for example.
Lower NI and Income Tax contributions - this can save the employee a lot of money and help them get the most out of their salary.
How Do Employers Benefit?
Increased employee satisfaction - as aforementioned, a salary sacrifice scheme can help with satisfaction and retention because this is a valuable perk.
Recruitment may become easier - Offering salary sacrifice can help attract and retain top talent and is often seen to be a competitive offering.
Reduced National Insurance - Employers pay less tax by saving money on National Insurance contributions. This is because tax doesn’t need to be paid on the salary that is sacrificed.
Tax Benefits and Implications
When considering the pros and cons of salary sacrifice car schemes, tax plays an important role.
Tax Benefits
Salary sacrifice in the UK offers several tax benefits, both for employees and employers. By sacrificing a portion of their salary for benefits, employees lower their taxable income, which means they pay less income tax. This reduction can be significant, depending on the salary level and the amount sacrificed.
Employees and employers both benefit from reduced National Insurance contributions. Since the salary sacrifice reduces the employee's gross salary, National Insurance is calculated on the lower amount, resulting in savings for both parties
Some benefits offered through salary sacrifice, like childcare vouchers, private healthcare, or pensions, may not be subject to tax or National Insurance, meaning employees can access these benefits tax-free or at a reduced rate.
One of the most common uses for salary sacrifice is to contribute to pension schemes. The sacrificed salary is directed into the employee’s pension fund, and these contributions are often made before tax, maximizing retirement savings.
Through salary sacrifice, employees may access benefits such as cars, bikes for commuting, or technology at a lower cost than if they paid for these benefits after tax. This allows them to maximise their savings.
Implications
While salary sacrifice has benefits, there are important implications to consider.
Pension Contributions: Lower salary means lower pension and NI contributions. This could affect future retirement savings for both state, and privately funded pensions.
Salary-Related Benefits: Reducing salary may reduce eligibility or payouts for benefits tied to salary, like life insurance or redundancy payments.
Take-Home Pay: Salary sacrifice reduces take-home pay, which could impact daily cash flow, especially if a large portion of salary is sacrificed.
Loan or Mortgage Applications: A reduced salary might make it harder to qualify for loans or mortgages.
Unneeded Benefits: If employees don’t fully use the benefits offered, they might sacrifice their salary for benefits they don’t need, affecting their financial situation.
Long-Term Financial Impact: Over time, salary sacrifice could impact overall financial growth, savings, and retirement income. Regularly assessing the scheme is important.
While salary sacrifice offers tax and National Insurance savings, employees should weigh the broader impact on benefits, pensions, take-home pay, and loan eligibility.
Employers should ensure transparency and help employees understand the potential impacts.
How Salary Sacrifice in the UK Could Benefit You
In summary, while both salary packaging (Australia) and salary sacrifice (UK) aim to reduce taxable income and offer tax benefits, there are distinct differences between the two systems.
Australia's salary packaging is broader in scope, allowing employees to allocate their pre-tax income towards a wide range of fringe benefits such as cars, health insurance, and loan repayments. This system is particularly beneficial for higher-income earners and is coupled with the employer's responsibility to pay Fringe Benefits Tax (FBT), which may be partially passed on to the employee. The flexibility of benefits offered under salary packaging makes it a useful tool for managing taxes, but the FBT implications require careful consideration.
In contrast, the UK's salary sacrifice is more focused on specific benefits, particularly pensions, childcare vouchers, and company car schemes. Salary sacrifice allows employees to lower their National Insurance contributions and pay less income tax, but it typically applies to fewer benefits and has a more direct impact on pension contributions. Unlike Australia, there is no Fringe Benefits Tax in the UK, and the system is more commonly associated with long-term savings like retirement planning.
Both systems offer significant tax advantages, but the key differences lie in the scope of benefits, the tax treatments, and the responsibilities of employers. While Australia's salary packaging offers a wider variety of benefits and involves FBT, the UK’s salary sacrifice is simpler but more focused on specific benefits and long-term financial planning. Employees in both systems need to assess how these schemes impact their take-home pay, overall financial goals, and eligibility for certain benefits, ensuring they choose the option that best fits their needs.
Last updated: 13.02.25
