Salary sacrifice: A guide for employers

Salary sacrifice is gaining traction in New Zealand, presenting a valuable opportunity for employers to enhance their benefits offering. Our 2025 Salary Survey found that 64% of employees would consider salary sacrificing if it were available to them. This growing interest highlights a shift in employee expectations, with many seeking flexible compensation options that support their long-term financial wellbeing. 

In this blog, we explore how salary sacrifice can potentially benefit your business by helping to attract and retain top talent.

What is salary sacrifice?

Salary sacrifice, also known as salary packaging, is an arrangement where employees agree to forgo a portion of their pre-tax salary in exchange for certain benefits. These benefits may include additional KiwiSaver contributions, mortgage or rental support, car leasing, professional development, and other perks.

How does salary sacrifice work for employers?

Salary sacrifice is a voluntary agreement between an employer and an employee. Employers deduct the agreed portion of an employee’s pre-tax salary and allocate it toward approved benefits.

Key employer responsibilities:

• Payroll processing: Adjust employee salaries and ensure deductions are correctly allocated to the chosen benefits.

• Tax and compliance: Understand how salary sacrifice impacts tax obligations, reporting requirements, and compliance with employment laws.

• Benefit administration: Coordinate with benefit providers, such as KiwiSaver funds or leasing companies, to manage contributions and entitlements.

• Employee communication: Clearly explain salary sacrifice options, advantages, and any potential financial implications to staff.

Employer considerations:

• Some benefits may be subject to concessional tax rates. 

• Salary sacrifice agreements must be documented to ensure transparency and compliance.

• While salary sacrifice can reduce an employee’s taxable income, it does not lower the employer’s gross salary cost unless structured strategically.

Implementing salary sacrifice effectively requires clear policies, seamless payroll integration, and proactive employee engagement to maximise its value for both your business and your workforce.

Why employers should offer salary sacrifice schemes

Offering salary packages can provide multiple advantages, including:

• Attracting and retaining talent: Employees value benefits that support their financial goals, making salary sacrifice a strong incentive.

• Enhancing your employer brand: Providing flexible salary packaging options positions your organisation as a competitive and employee-focused workplace.

• Potential tax advantages: Depending on the benefits offered, salary sacrifice arrangements can create tax efficiencies for employees.

• Increased engagement and productivity: Employees who feel financially supported are likely to be more engaged and productive at work.

• Supporting employee financial wellbeing: Offering salary sacrifice can help employees manage expenses, plan for the future, and reduce financial stress.

What salary sacrifice schemes are available?

Offering a range of salary sacrifice options allows employers to provide flexible benefits that support employees’ financial wellbeing and long-term goals. According to our 2025 Salary Survey, in New Zealand, KiwiSaver contributions (16%) and mortgage contributions (23%) are the most popular salary sacrifice choices, demonstrating a strong demand for financial security and future planning. By incorporating these options into your benefits package, you can enhance employee satisfaction, improve retention, and position your organisation as an employer of choice. 

Here are some common salary sacrifice options to consider:

• KiwiSaver contributions: Employees can boost their retirement savings with pre-tax income, potentially benefiting from tax advantages.

• Mortgage or rental contributions: Helping employees reduce their mortgage or rental burden can improve financial security.

• Car loan or novated lease: Offering novated leases or transport subsidies provides cost-effective commuting solutions.

• Professional development: Funding training, courses, or professional memberships supports career growth and retention.

• Health and wellbeing benefits: Salary packaging private health insurance, gym memberships, or wellness programs promotes a healthier workforce.

• Childcare assistance: Supporting employees with childcare costs can help attract and retain working parents.

• Additional leave: Some employers allow staff to purchase extra leave, providing greater flexibility for work-life balance.

How to set up a salary sacrifice scheme

To introduce salary sacrifice effectively:

1. Assess demand: Conduct employee surveys or discussions to understand which benefits are most valued.
2. Develop clear policies: Outline eligibility, available benefits, tax implications, and administrative processes.
3. Engage payroll and HR teams: Ensure smooth implementation by aligning salary sacrifice options with payroll systems.
4. Communicate with employees: Provide education sessions, FAQs, and personalised guidance to help employees make informed decisions.
5. Monitor and review: Regularly assess uptake, employee feedback, and financial impact to optimise the program over time.

Employers need to ensure payroll systems are set up to correctly deduct and allocate salary sacrifice contributions. Keeping accurate records and complying with reporting requirements is essential to avoid financial and legal complications.

Benefits for employers: Talent retention and employee wellbeing

Incorporating salary sacrifice into your benefits package can help attract and retain skilled professionals in a competitive job market. By supporting employees in managing their finances through salary sacrifice, businesses can also reduce financial stress, leading to higher morale, productivity, and overall workplace satisfaction.

Compliance and legal considerations

Are salary sacrifice contributions taxed?

While employees may see tax benefits, some salary sacrifice contributions—such as KiwiSaver—may still be subject to concessional tax rates. Employers should consult with financial and tax professionals to ensure compliance.

Reporting obligations for employers

Employers must accurately report salary sacrifice contributions to the relevant tax authorities and ensure they comply with any legal requirements for disclosures in payroll reporting.

When is salary sacrifice not worth offering?

Salary sacrifice may not be beneficial if:

• The administrative burden outweighs the benefits.

• Employees have low earnings and cannot afford a reduction in take-home pay.

• Certain benefits incur additional tax liabilities or compliance costs.

Encouraging uptake among employees: Education and support

To maximise participation in salary sacrifice schemes, employers should actively promote the benefits, provide clear information, and offer personalised support. Integrating salary sacrifice into your Employee Value Proposition (EVP) and benefits offering ensures that both current employees and potential hires recognise it as a valuable perk.

How to communicate salary sacrifice benefits to staff

Clear communication is key to engagement. Employers can use educational materials, workshops, and one-on-one consultations to explain how salary sacrifice works and its advantages. Regular updates via newsletters, emails, and intranet posts help maintain awareness, while case studies and real-life examples showcase its impact on financial wellbeing.

Helping employees calculate their contributions

Employees may be unsure how much they can afford to sacrifice. Providing salary sacrifice calculators and access to financial advisors can help them make informed decisions. Sharing clear examples of potential tax savings and long-term financial benefits can further encourage uptake.

Integrating salary sacrifice into EVP and recruitment

Salary sacrifice should be positioned as a key workplace benefit. Highlight it in job ads, onboarding materials, and benefits guides to showcase it as part of your total compensation package. Including it in EVP materials, performance discussions, and internal events reinforces its value and boosts participation.

Addressing common employee concerns

Common concerns include:

• Impact on mortgage applications: Some lenders assess reduced taxable income, which could affect borrowing capacity.

• Tax implications: Employees may not fully understand how salary sacrifice affects their tax position.

• Flexibility: Employees may worry about locking funds into benefits that may not be accessible in emergencies.

Final thoughts on offering salary sacrifice

Salary sacrifice is an attractive benefit that can enhance your employer brand, improve retention, and support employee financial wellbeing. By offering flexible options such as KiwiSaver contributions, mortgage support, and professional development funding, businesses can create a compelling value proposition for current and prospective employees.

Next steps for employers

If you’re considering implementing salary sacrifice, start by consulting with financial and legal experts to ensure compliance. Engage with employees to gauge interest and develop a tailored salary sacrifice program that aligns with both business objectives and employee needs.

Want to stay ahead in talent attraction and retention? Download our latest Salary Guide for insights into salary benchmarks and compensation trends across industries.

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.