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What Is Salary Sacrificing - Pretty Penny Loans New Zealand

What Is Salary Sacrificing?

13/11/19

Salary sacrifice is where an employee packages part of his wage. This is done to receive remuneration in another form more suited to his needs and higher employer contributions to a superannuation scheme.

In essence, anyone benefits from salary sacrificing to insure their future, particularly on retirement.

Salary sacrifice can result in employees to build a higher level of wealth for retirement and have greater individual accountability for their retirement savings and financial health.

These factors should benefit employers in managing their employees. An employee receives lower immediate income but higher deferred income — by sacrificing salary and receiving a higher employer contribution. The amount sacrificed shifts from being taxed under the PAYE system to the ESCT system.

The net remuneration may increase depending on the employee’s income level because of the different tax treatment for some income bands. The total value of the gross remuneration and cost to the employer remain unchanged.

Besides higher-net remuneration, there are other things to consider.

Payroll system

Employers will need to determine whether if the payroll system can handle multiple definitions of salary, variable employer contribution rates, and multiple ESCT rates.

ACC

Any employee who sacrifice below $120,070 should separately evaluate his disability income needs. Employers should make their employees aware of the potential consequences.

Employers need to make sure that their life and disablement insurance policy suit the sacrificed salary. Also, the insurance formula needs to be based on a notional salary, like equivalent gross remuneration.

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Investment

Generally, employees who sacrifice salary for retirement savings purposes will have above average wealth and will want the investment of these assets to be part of their overall investment strategy.

Many may want a higher or lower level of share investments than many superannuation schemes. Similarly, those employees looking to access their sacrificed salary will want to cash assets.

There’s a probability that salary sacrifice will increase the demand for more flexible investment options.

KiwiSaver

With the standard Employer Superannuation Contribution Tax (ESCT) regime applied to the employer contributions to KiwiSaver and equivalent complying locked-in schemes, a small tax advantage is provided to employees looking to save for their retirement.

As contributions paid to KiwiSaver can be withdrawn, salary sacrifice can be a great way to help qualified people save for a deposit.

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