Sacrifice my Pay for What?
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- Last Updated: Wednesday, 26 February 2025 14:38
Basically, its simply a system for an employee to move some income from a higher tax bracket to a lower one. Because it reduces the income subjected to the highest marginal tax rate, it is possible to reduce the overall tax significantly and it is quite legal to do this.
How it works is for the employee to take a salary cut, thus reducing the PAYE deducted from the employee. In return the employer increases the employer contribution to the employees superannuation by the same gross amount. It therefore costs the employer nothing overall and the employee benefits from a greater retirement income with little effect on his take home pay.
As one might expect, how effective this is depends entirely on the employee tax code and the difference between his PAYE and the amount of ESCT the employer pays on its contributions, as only the net goes to the employees super fund. Manually calculating the benefit for an individual employee can be quite a challenge and is best done by trial changes to an employee within payroll.