Salary Sacrifice and Pre-Tax Benefits Explained

## What Is Salary Sacrifice?

Salary sacrifice (also called salary packaging) is an arrangement where you agree to receive less gross salary in exchange for benefits that are not subject to income tax or social security contributions. The result is the same or better benefit at a lower cost.

## How It Works

Instead of receiving $100,000 in salary and buying a benefit with after-tax dollars, you receive $90,000 in salary and $10,000 in pre-tax benefits.

On a 32% marginal tax rate:
- **Without sacrifice**: $100,000 salary → $68,000 net → buy $10,000 benefit → $58,000 remaining.
- **With sacrifice**: $90,000 salary → $61,200 net → benefit already provided → $61,200 remaining.
- **Saving**: $3,200/year.

## US Pre-Tax Benefits

### 401(k) and 403(b)

The most common pre-tax arrangement. Up to $23,500 in pre-tax contributions ($31,000 if 50+). Reduces federal, state (in most states), and some local taxes.

### Health Insurance Premiums (Section 125)

Employer-sponsored health insurance premiums are typically paid pre-tax through a Section 125 cafeteria plan. This reduces income tax AND FICA tax.

### FSA (Flexible Spending Account)

- Healthcare FSA: $3,200 pre-tax for medical expenses.
- Dependent Care FSA: $5,000 pre-tax for childcare.
- Use-it-or-lose-it (most plans allow $640 rollover).

### HSA (Health Savings Account)

The gold standard of pre-tax accounts:
- Pre-tax contributions: $4,300 individual, $8,550 family.
- Tax-free growth and tax-free qualified withdrawals.
- No expiration — rolls over indefinitely.
- After 65, withdrawals for any purpose (taxed like Traditional IRA).

### Commuter Benefits

Up to $325/month pre-tax for transit or parking.

## UK Salary Sacrifice

UK salary sacrifice is broader and saves both income tax AND National Insurance:

### Pension (Most Valuable)

Sacrificing salary into a workplace pension saves:
- Income tax at your marginal rate (20-45%).
- Employee NIC (8%).
- Employer saves NIC too (13.8%), often passed to the employee as extra pension contribution.

On a £80,000 salary, sacrificing £10,000 to pension:
- Tax saved: £4,000 (40% rate)
- NIC saved: £800 (8%)
- Employer NIC saved: £1,380 (often added to pension)
- Total benefit: £6,180 on a £10,000 sacrifice.

### Other UK Sacrifice Options

- Cycle to work scheme (save ~42% on a bicycle).
- Electric vehicle salary sacrifice (save ~40%).
- Childcare vouchers (legacy scheme, closed to new entrants).

## Australia Salary Sacrifice

Salary sacrifice to superannuation is taxed at 15% inside the fund instead of your marginal rate (up to 45%). The concessional cap is $30,000/year.

Additional options: novated car leases, portable electronic devices, self-education.

## Key Takeaways

1. Salary sacrifice reduces your taxable income, not your total compensation.
2. In the UK, salary sacrifice saves NIC on top of income tax.
3. HSA is the most tax-efficient account in the US (triple tax advantage).
4. Always check the impact on your take-home pay before committing.
5. Salary sacrifice may affect mortgage applications (lower stated income).