What is a Salary Sacrifice?

Salary sacrifice and salary packaging are terms used most commonly in the UK and Australia, and refer to a work arrangement between employer and employee. People in the US or Canada can have similar arrangements. In fact, employers, in lieu of a certain portion of salary, may get many perks or paid expenses.

In a basic arrangement that involves salary sacrifice, an employee gives up some of their salary in order to receive certain benefits from their employer. These may be called fringe benefits and can include things like cars, computers, housing, or contribution to retirement accounts. Depending upon the country in which this takes place, this may result in an employee’s pay being taxed at a lower rate. Much depends upon how salary sacrifice is written and what types of benefits are offered to the employee.

In the US, you’ll see examples of salary sacrifice especially among people who work in live-in situations, where in addition to salary, they also receive room and board. Room and board may not be considered taxable, depending upon the specific work situation. Another form of salary sacrifice in the US is that given to people in active service in the military. They may receive housing at no cost if they live on base, or be given a housing allowance that isn’t really part of salary, and such housing can include accommodations for spouses and children. Alternately, low rate of pay in the military can mean the opportunity to go to college for reduced rates at a later time.

In other countries, salary packaging is a formal arrangement between employee and employers where a person makes 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 cellphones might not be considered part of a person’s salary, lowering overall tax rate, but larger or more expensive items like huge investments, cars, or homes will probably be considered as part of salary.

Economic advisors suggest reading salary sacrifice agreements very carefully, and many experts suggest consulting a lawyer before you agree to one. The main difficulty people may encounter when they make such agreements is the rate at which items given in lieu of salary are priced. Some companies overvalue these benefits, resulting in higher deductions to salary than are really necessary. In other words, salary sacrifice can mean overpaying for things you could get more cheaply if you had your full salary and acquired these things on your own.

With a good lawyer or employee advocate, you may be able to decrease the amount of sacrificed pay through negotiation. This isn’t always possible. Some employers, like the US military, have set pay rates that are inflexible.

In other circumstances, if you propose to be a live-in nanny for instance, you’d need to determine if room and board really do represent appropriate financial compensation on top of salary. With companies that offer salary sacrifice as an option, you may want to evaluate the potential tax benefits of making a lower salary against the potential income benefits that would come from maintaining a full salary. Furthermore, consider whether what the company is offering as part of your salary is being estimated at appropriate cost, or represents a true sacrifice on your part that lowers your income.