Salary sacrifice: NZ employer’s guide

Looking to understand what salary sacrifice is and how it works? We’ve here to help. Salary sacrifice, or salary packaging, is when an employee swaps part of their pre-tax salary in exchange for additional KiwiSaver contributions, a private superannuation scheme or support with other payments like mortgage, rental or childcare support. 

Salary sacrifice is becoming a more attractive option for many employees, so it’s important that employers understand how it may work in your workplace. 

What is salary sacrifice?

Salary sacrifice is a mutual arrangement, where an employee agrees to forgo part of their pre-tax salary in return for benefits. They are a way for employees to get more out of their pre-tax salary.

What are the types of salary sacrifice schemes?

There are a range of salary sacrifice schemes available in New Zealand, with both financial and non-financial benefits. As the employer, it’s important to understand how you can maintain compliance if an employee engages in a salary sacrifice scheme, as well as the tax implications. 

Mortgage or rental contributions

Employers can offer salary sacrifice on mortgage or rental contributions. In this case, mortgage or rental costs will come out of your employee’s before-tax income, reducing their taxable income. 

Car loan or novated lease

Novated leases or car loans can be offered through a salary sacrifice scheme. All running costs can also be included, like fuel, insurance and general maintenance. However, fringe benefit tax may apply. You can learn more through the IRD’s guide to FBT.

Professional development and training

Professional development and training costs like course fees, professional membership subscriptions and learning materials can form part of a salary sacrifice scheme. As the employer, you can take the cost of the materials or training out of their pre-tax salary. 

Health and wellbeing

More and more employees are looking to improve their health and wellbeing. As an employer, you can support them by taking the cost of things like medical insurance, gym memberships and wellbeing programs out of their pre-tax salary. However there may be fringe benefit tax involved, which you as the employer have to pay if liable.  

Childcare support

You may also look to take childcare expenses out of your employee’s pre-tax salary as part of a salary sacrifice scheme. This often looks like a direct payment from you to the childcare provider. 

KiwiSaver contributions

Employers typically must contribute a minimum of 3% of an employee’s before-tax pay to their KiwiSaver. However, employees can make additional voluntary contributions.

How does salary sacrifice work?

Wondering how salary sacrifice works? Here’s a step-by-step guide:

1. First, you’ll need to agree with your employee on what they’re looking to salary sacrifice, along with the amount they want to sacrifice.
2. You’ll need to reduce their pre-tax salary by the agreed sacrifice amount.
3. Taxes (PAYE and the ACC Earners’ Levy) are applied based on their lowered salary.
4. Develop and keep detailed records of any benefits paid as a result of the scheme.
5. Notify the IRD of the reduced salary, as well as any deductions or payments made. 
6. Make sure the employee’s payslip outlines their total pay, the amount they’ve sacrificed, their reduced gross salary and the nature of the sacrifice.

What are the rules around salary sacrifice?

There are some rules around the use of a salary sacrifice. Here’s what you need to know.

Employer obligations and compliance

As the employer, there are a few obligations you need to meet in order to maintain compliance. These include:

• Maintaining written agreements, as these prove that your employee is sacrificing a portion of their salary in exchange for a benefit
• Ensure you’re capturing payroll deductions correctly (for example, that the sacrifice is a pre-pay reduction)
• For any non-KiwiSaver contributions, you may have to register for and pay fringe benefit tax, so this must be done in accordance with IRD regulations
• All salary sacrifice schemes must be correctly reported to the IRD 

Employee obligations and rights

Employees also have a few obligations and rights around salary sacrifice schemes. These include:

• Voluntarily participating in any salary sacrifice scheme they’re in
• Providing written consent to the salary sacrifice scheme 
• Receiving payslips that clearly outline the nature and details of the salary sacrifice scheme 

What are the benefits of a salary sacrifice scheme?

There are a few benefits to providing a salary sacrifice scheme. For the employer, it’s a way of increasing retention, while offering more value to current and potential employees. As an employee, it’s a way of accessing better benefits and managing their tax situation more efficiently.

What are common risks of a salary sacrifice scheme?

However, there are a few common risks of a salary sacrifice scheme that everyone should be conscious of. Primarily it can pose a financial risk for your employee, such as reduced borrowing capacity based on their taxable income if they want a home loan/

As an employer, you also need to ensure you’re correctly reporting your use of the schemes. Your business could be at risk if IRD finds that you’ve incorrectly reported the schemes or if you’ve mistakenly identified a benefit as FBT-exempt. 

The process itself can also be confusing. If employees don’t fully understand how salary sacrifice works, they could potentially make the wrong decisions about their financial future. 

What is the process for offering salary sacrifice?

When starting the process of a salary sacrifice, here are a few steps you’ll need to take.

Communicate salary sacrifice benefits to staff

Because there are a lot of important considerations when using these benefits, we recommend developing a salary sacrifice policy. In this you should outline a standard salary sacrifice agreement, how you’ll facilitate salary sacrifice schemes and the types of benefits you’ll provide.

Once this is developed, you should clearly communicate with staff that you now offer salary sacrifice benefits and hold open communication sessions where employees can ask questions and clarify any misunderstandings.

Integrate salary sacrifice into your EVP

You should also identify and highlight the potential salary sacrifice schemes as part of your employee value proposition (EVP). This can help make your workplace more attractive to potential employees.

What happens if an employee leaves during a salary sacrifice arrangement?

If an employee leaves during a salary sacrifice agreement then you have a few obligations. The scheme typically automatically terminates on their last day with your company as it’s tied to their employment.

If there is a balance left to cover on any benefits then typically this is paid by the employee out of their final net pay. However, this is a discussion you’ll need to have with them.

How can payroll software support salary sacrifice schemes?

Accurate payroll processing is critical when offering a salary sacrifice scheme. Use automated systems like Employment Hero to manage deductions, contributions and reporting. Our payroll software is designed to support compliance and streamline the process.

Find out how Employment Hero’s payroll software can support your business.