Salary sacrifice — also called salary packaging — is an arrangement where you give up a portion of your gross salary in exchange for a non-cash benefit. Done correctly, it can reduce your taxable income, lower PAYE, and increase the value of what you receive. However, NZ’s tax rules around salary sacrifice are more restrictive than in Australia, and not all employers offer it.
In NZ, salary sacrifice is most commonly used for KiwiSaver — you can voluntarily contribute more than the minimum, reducing your net pay. But KiwiSaver salary sacrifice does not reduce your taxable income or PAYE. For salary sacrifice to save tax, the benefit must be exempt from Fringe Benefit Tax (FBT) or structured as a tax-favoured arrangement. Common tax-favoured options include employer superannuation contributions (above KiwiSaver) and some health insurance. Speak to your employer's HR or a tax adviser before assuming salary sacrifice saves tax.
What Is Salary Sacrifice?
Salary sacrifice means agreeing with your employer to receive less gross salary in exchange for a benefit. The benefit is provided by the employer instead of that portion of salary.
In Australia, this reduces taxable income across a wide range of benefits (cars, computers, meal entertainment).
In NZ, the rules are different: most employer-provided benefits are subject to FBT, which is paid by the employer — meaning the PAYE saving from salary sacrifice is offset by the employer’s FBT cost. Employers usually pass this cost back or simply don’t offer it.
KiwiSaver Voluntary Contributions
The most common form of “salary sacrifice” in NZ is voluntary KiwiSaver contributions:
| KiwiSaver contribution | Effect |
|---|---|
| Mandatory 3% employee contribution | Deducted from gross pay, PAYE calculated on full gross |
| Voluntary extra contributions (e.g., 4%, 6%, 8%, 10%) | Also deducted from gross — PAYE is not reduced |
Key point: KiwiSaver contributions (mandatory or voluntary) do not reduce your taxable income for PAYE purposes. You pay PAYE on your full gross salary, then KiwiSaver is deducted from the remaining pay.
This differs from many overseas systems. The benefit of higher KiwiSaver contributions is long-term investment growth — not immediate tax reduction.
Choosing a Higher KiwiSaver Rate
You can elect 3%, 4%, 6%, 8%, or 10% contributions at any time by completing a KiwiSaver contribution rate change form (KS6 or via your employer).
Benefits That Can Genuinely Reduce Tax via Salary Sacrifice
Some benefits are structured so that PAYE or FBT does not apply:
Employer Contributions to Superannuation (Non-KiwiSaver)
Employer contributions to registered superannuation schemes (beyond KiwiSaver) are taxed via ESCT (Employer Superannuation Contribution Tax) — not FBT. If an employer contributes more to a superannuation scheme instead of paying salary, the employee saves PAYE on that portion. ESCT is lower than high PAYE rates:
| Employee’s marginal PAYE rate | ESCT rate |
|---|---|
| Up to 10.5% | 10.5% |
| Up to 17.5% | 17.5% |
| Up to 30% | 28% |
| 33% | 33% |
| 39% | 39% |
For high earners, ESCT matches their marginal PAYE rate, so the saving disappears. For lower earners, the cap is the same. Limited practical saving through this route in most cases.
Charitable Giving Through Payroll Donations
You can direct salary to approved charity via payroll giving, receiving a tax credit of 33.33 cents per dollar donated — reducing the after-tax cost of giving. This is not strictly salary sacrifice but has a similar economic effect.
Effect on ACC Levies
Your ACC earner levy is calculated on liable earnings (your gross income). If you reduce your gross salary through a genuine salary sacrifice arrangement, your liable ACC earnings decrease — and so does your ACC levy. For most employees, this difference is minor.
Effect on Working for Families
Working for Families entitlements are based on “family scheme income,” which includes most income streams. A genuine salary sacrifice that reduces gross income also reduces WFF assessable income — potentially increasing WFF entitlements. However, employer-provided benefits may be counted as income under WFF rules depending on the benefit type.
What Most Employees Can Practically Do
| Strategy | Tax saving? | Notes |
|---|---|---|
| Higher KiwiSaver contributions | No — no PAYE saving | Long-term investment benefit |
| Employer-paid health insurance | Employer pays FBT | Some employer-funded health cover is FBT-exempt (certain policies) |
| Company car | Employer pays FBT | No net saving for employee; FBT is employer’s cost |
| Work phone/laptop | Exempt if for work | No FBT on work tools used mainly for work |
| Charitable payroll giving | 33% tax credit on donation | Effective way to give tax-efficiently |
Frequently Asked Questions
Is salary sacrifice tax-free in NZ?
Not automatically. Unlike Australia, NZ subjects most employer benefits to FBT. True tax savings from salary sacrifice are limited — KiwiSaver sacrifice reduces take-home pay but not PAYE. Speak to a tax adviser for your specific situation.
Can I salary sacrifice my mortgage repayments?
No — mortgage payments are a personal expense and cannot be provided as a tax-free or FBT-exempt employer benefit in NZ.
Does salary sacrificing into KiwiSaver affect my ACC levies?
Employee KiwiSaver contributions do not reduce your gross salary for ACC levy purposes — ACC levies are calculated on your total gross salary before KiwiSaver deductions.
My employer offers salary packaging — what should I check?
Ask what benefits are included, whether the employer is paying FBT on the benefits, whether the arrangement is IRD-compliant, and whether it actually reduces your net cost vs. simply providing the benefit.