Salary sacrifice: A guide for employees

Salary sacrifice is gaining traction in New Zealand. Our 2025 Salary Survey found that 64% of employees would consider salary sacrificing if it were offered to them as a benefit. This growing interest reflects a shift in compensation trends, as more employees seek flexible benefits that go beyond base salary to enhance their overall financial wellbeing. In this blog, we explore this incentive and how it could be beneficial to you.
 

What is salary sacrifice?

Salary sacrifice, also known as salary packaging, is an arrangement where you agree to forgo a portion of your pre-tax salary in exchange for certain benefits. These benefits can include superannuation contributions, mortgage contributions, car leasing, childcare, and other perks that may align with your financial goals and lifestyle.
 

How does salary sacrifice work?

Salary sacrifice allows you to redirect part of your salary towards approved benefits before tax is applied. This can potentially lower your taxable income, meaning you pay less tax while gaining valuable benefits.
 

Benefits of salary sacrifice for employees

Salary sacrifice offers a range of advantages that go beyond simple tax savings, making it an attractive option for employees looking to optimise their finances. Here are some key benefits to consider:

Tax savings: Salary sacrifice can reduce your taxable income, potentially placing you in a lower tax bracket. 

Increased KiwiSaver savings: Allocating more money to your KiwiSaver fund helps you build long-term wealth.

Additional perks: Access to benefits such as health insurance, professional development, and vehicle leasing.

Budgeting benefits: Automating contributions can help with financial planning and discipline.
 

Types of salary sacrifice schemes available

Various scheme options offer flexibility for employees to direct pre-tax income toward benefits that align with their financial goals and lifestyle. According to our 2025 Salary Survey, in New Zealand, KiwiSaver contributions (16%) and mortgage contributions (23%) are the most popular reasons to salary sacrifice, highlighting an interest in long-term financial planning. Here are some common options available:

• KiwiSaver contributions: Salary sacrificing into KiwiSaver allows you to boost your retirement savings with pre-tax dollars, helping you build a larger nest egg while potentially benefiting from employer matching and tax advantages.

• Home loan or mortgage contributions: Redirecting part of your salary to make additional repayments on your mortgage can help reduce the overall term and interest paid, bringing you closer to being debt-free.

• Car loan or novated lease: A novated lease provides a cost-effective way to access a vehicle by including all running costs—like fuel, maintenance, and insurance—within your salary sacrifice arrangement, simplifying budgeting.

• Work-related expenses: Cover expenses such as professional memberships, further education, or training courses, which can support career development while saving on tax.

• Health and wellbeing benefits: Invest in your physical and mental health with options like private health insurance, gym memberships, or wellness programs, allowing you to maintain a healthier lifestyle.

• Childcare: Reduce the financial strain of childcare expenses by including it in your salary sacrifice arrangement, giving you more flexibility to balance work and family life.

• More annual leave: Some employers allow you to purchase additional annual leave through salary sacrifice, giving you greater flexibility to enjoy extended breaks or spend more time with family.

These options highlight how salary sacrifice can cater to diverse financial priorities, from immediate needs like childcare to long-term goals like paying off a mortgage or saving for retirement.
 

Financial implications for employees

Salary packaging can offer significant financial advantages for employees, particularly in terms of reducing taxable income. By directing a portion of your pre-tax salary toward approved benefits such as KiwiSaver contributions or other eligible expenses, you can potentially lower your overall tax liability. 

This reduction may even place you in a lower tax bracket, resulting in additional savings. However, while salary sacrifice reduces the portion of your salary subject to PAYE or income tax, certain benefits, such as superannuation contributions, may still incur concessional tax rates.

It’s also important to consider how your chosen scheme aligns with your overall financial situation. Because these arrangements involve reducing your take-home pay, they may not be ideal if you need immediate access to income for day-to-day expenses. 

Additionally, salary sacrifice contributions typically don’t form part of your assessable income when filing your tax return, which can simplify tax reporting but might also affect borrowing capacity if lenders assess your reduced taxable income. Careful planning and a clear understanding of both the advantages and trade-offs are essential to ensure this strategy supports your financial goals.
 

Salary sacrifice and KiwiSaver

Salary sacrificing into your KiwiSaver can be a powerful way to grow your retirement savings while potentially benefiting from tax advantages. However, any employer KiwiSaver contributions made on your behalf will be subject to a contributions tax. The advantage of salary sacrifice lies in the difference between this tax rate and your usual income tax rate.

Additionally, employer contributions may be boosted through matching schemes where applicable, further enhancing your retirement nest egg. However, it’s crucial to be aware of contribution limits set by the government to avoid excess contribution penalties and to ensure that you’re making the most of your salary packaging strategy without incurring additional costs.
 

Practical considerations for salary sacrifice

Before committing to a salary packaging arrangement, it's important to understand how it may impact your financial situation. While there are potential tax benefits and additional perks, consider the following:

• Impact on take-home pay: Your disposable income will be lower, so ensure your remaining salary covers essential living expenses.

• Calculating a salary sacrifice: Work with your employer or a financial advisor to determine an affordable amount that maintains your financial stability.

• Backdating salary sacrifice: These arrangements apply only to future earnings and cannot be backdated.

• Mortgage eligibility considerations: Some lenders may assess your reduced taxable income when evaluating loan applications, which could affect your borrowing capacity.
   

Making the right decision: Pros and cons

Pros:

• Tax advantages

• Long-term financial planning

• Potential employer matching contributions

Cons:

• Reduced immediate income

• Limited access to sacrificed funds

• Potential impact on borrowing capacity
   

Common mistakes to avoid

• Sacrificing too much and struggling with day-to-day expenses

• Not understanding the tax implications

• Overlooking contribution limits
   

Key takeaways

Salary sacrifice can be a powerful financial strategy to boost your KiwiSaver or access valuable benefits while lowering your taxable income. It is important to ensure that a scheme you choose aligns with your financial goals and lifestyle. Careful planning and a clear understanding of your overall financial position will help you make the most of salary packaging without compromising your day-to-day financial needs.
 

Next steps for employees considering salary sacrifice

Start by having a conversation with your employer and a financial advisor to understand your options and how they fit into your financial plan. Review your budget carefully to assess whether you can afford to reduce your take-home pay while still meeting your daily living expenses. Finally, take the time to evaluate the long-term impact this strategy may have on your financial future, ensuring it aligns with your goals for retirement and financial wellbeing.

Discover your earning potential – Download our latest Salary Guide to explore salary benchmarks across industries and job roles.

Disclaimer: The information provided in this article is for general informational purposes only. It is not intended as legal, financial, or professional advice. Please consult a qualified professional for advice specific to your situation.