To have a financially secure future, it's important to know all your options to make the most out of your income.
Whether you're saving for your retirement, first house, or a new car, 'salary sacrifice' is one of the many options out there that can help you. If you're one of those who are still confused or don't have any clue what this means, keep reading for a guide on what it's all about.
If you're an employee who wants to set aside part of your salary, then that's what it's about. Salary sacrifice lets you grow your money or get earnings in a way that fits your future plans and needs. An example of this is paying higher employer contributions to a pension plan. It's also one way to minimize your tax bill!
Employers encourage salary sacrifice to their employees to plan their retirement better and have more savings in the future. This also makes them more accountable for their finances.
Salary sacrifice is ideal for employers with a total remuneration policy. A remuneration policy is often established to attract and motivate employees by providing remuneration programs that are flexible and affordable at the same time and usually give incentives to drive both short-term and long-term results to maximize their money.
The net remuneration may increase depending on the different tax treatments for some income bands. In contrast, the total value of the gross remuneration and cost to the employer will remain the same.
Employees earning less than $84,000:
You may get a benefit since this will lower their tax rate.
Employees earning between $14,001 to $16,800, $48,0001 to $57,6000, and $70,001 to $84,000:
Because of lower tax, your salary sacrifice will result in higher net-of-tax remuneration. This means you can save for your retirement from an income taxed at a lower rate.
Please note that the following employees do not benefit from salary sacrifice:
The amount sacrificed by the employee will be taxed under the ESCT system instead of the PAYE system, and the rates will depend on the total direct taxable pay and the employer's total contributions to superannuation. How much you can salary sacrifice may depend on your employer, but it's often used for things such as gadgets and superannuation.
Some tips to consider when making salary sacrificing decisions:
KiwiSaver is a government initiative to help Kiwis save for their retirement or first house. If you're employed, you're automatically enrolled in KiwiSaver, and contributions will be deducted from your salary. You have the choice to opt out after two weeks, but if you don't do it before eight weeks in your new job, you will be contributing permanently. You have the option to allocate 3%, 4%, 6%, 8%, or 10% of your pay to KiwiSaver. Your employer is also obliged to give at least 3% to their employee's KiwiSaver.
However, the employer contribution can also be deducted from your pay, a.k.a. salary sacrifice. This means that the employee will be paying the employer's contribution as well. This must be discussed and written into the employment agreement before signing their work contract.
If you've agreed to this arrangement, there should be a "total remuneration" clause in your employment agreement. The employer can't pay the employee less than the minimum wage after the deduction, and your total pay should be 3% higher than it would be if you were not contributing to a scheme.
If you’ve decided to get salary sacrifice, here are some things to take note of aside from having a higher deduction on your salary:
ACC is a New Zealand government entity that helps Kiwis through different types of financial support in case of an injury or accident, regardless of how the person was injured or who caused the injury/accident. Employees with sacrifice salary but lower salary usually save on their own ACC levy and/or reduce any ACC income benefit that becomes payable. Because of this, some employees may not choose to sacrifice below this level, and those who do should evaluate their disability income needs first, including employers, to help them become aware of the possible consequences.
Be sure to ask your employer first if you can have this option. Employers will need to make sure that they can manage multiple options such as salary, employer contribution rates, and numerous ESCT rates.
The employees’ salary is sacrificed to a non-locked scheme, but whether they can access the money before retirement is not guaranteed. According to most employers, it will not cause any extra costs or taxes.
While most employees will most likely not withdraw money and choose to save it in the scheme, knowing that they can access their sacrificed salary whenever is a great way to provide them security.
Whether you're sacrificing salary or not, saving for your future is important, and starting as early as today can help you reach financial security in the future!
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