How to Pay Less Tax with Salary Packaging and Increase Your Take-Home Pay

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Do you worry that you’re wasting your hard-earned income by paying too much to the tax office?

You could be.

But it needn’t be that way. There’s a simple strategy to pay less tax and increase your weekly pay packet.

It’s called salary packaging, and it’s the smart way to make the most of every dollar you earn.

Interested? Read on.

Salary packaging vs salary sacrifice

There’s no difference. Salary packaging and salary sacrifice are the same things.

It’s a convenient way of using your pre-tax salary or wages as payment for a range of benefits of similar value. Common benefits include cars and additional superannuation payments. And it’s totally approved by the Australian Taxation Office (ATO).

Can I salary package?

Are you a full or part-time employee? If you are, the answer is yes. Salary packaging is an option for all employees. But if you’re a contractor or casual worker, unfortunately, you’re not eligible.

It’s open for all salaries, but it’s typically more effective for people on mid to high incomes. They tend to have more funds available for additional or non-essential expenses.

The sizable benefits of salary packaging

  • Pay less tax as your taxable income is reduced.
  • Increase your take-home pay and have more money to spend on living or invest in your future.

Salary packaging explained simply

Normally, tax is taken from your salary before you’re paid. You’re then left to pay for any expenses out of your after-tax pay.

With salary packaging, your salary or wage remains the same, but selected expenses are paid for out of your pre-tax salary. You’re then taxed on the reduced salary (which can sometimes put you into a lower tax bracket) and paid the rest.

So, you are paid the same salary, could pay less tax, and have more take-home pay.

It’s a formal arrangement between you, the employee, and your employer. However, a revised work contract must be signed by both parties.

Your employer is then required to pay Fringe Benefits Tax (FBT) on the benefits provided to you.

Some of these benefits will be listed on your year-end payment summary and are used to assess a range of levies and surcharges. You may find that your Medicare levy, tax offsets, child support payments and other Government benefits are altered or reduced as a consequence.

What can I salary package?

It’s important to note that not all employers will be willing to salary package the same benefits. Most employers will happily offer salary packaging for superannuation, but you’ll need to discuss other benefits as every situation is different.

Options include:

  • Cars
  • Shares or bonds
  • Expense payments such as loan repayments, school fees, child care costs and home phone costs
  • Property
  • Superannuation
  • Computer software and laptops
  • Health insurance

Salary sacrifice benefits fall into three broad categories.

  • Fringe benefits. For payments towards items such as cars, health insurance, loans, school fees and child care fees. Your employer must pay FBT on these.
  • FBT exempt benefits. More appealing to many employers as they don’t generate more tax. Items such as portable electronic devices, computer software, laptop computers, protective clothing, a briefcase or tools of trade fall into this category.
  • Superannuation. Popular as salary sacrificed super contributions benefit both the employer and the employee. For starters, they are FBT exempt. And, within limits, super funds only pay 15% tax on these contributions, which is lower than the tax rate paid by most people.

Salary packaging the smart way

Salary packaging is a great financial strategy to maximise your income. But your financial situation is just that – yours. The only way to truly maximise the full benefits of salary packaging for your situation is to go one step further.

Contact a qualified tax expert who can help you work out the best strategy for you. Your personal salary packaging strategy will take into consideration your overall financial goals, and include some of the more complex aspects salary packaging – such as FBT exemptions, write-offs, travel benefits and other deductable expenses.

You know you work hard. You also know the smartest way to maximise your income is to pay less tax.

Giving more money than required to the tax office only means you have less in your pocket to spend.

Many professionals on all sorts of incomes successfully increase their take-home pay by thousands of dollars each year by salary packaging – and you can too.

You’ll have extra money to invest, or to go on that holiday you dream of.

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