This is commonly used to provide an employee with benefits such as pension contributions, childcare vouchers, annual leave, etc in return for the employee agreeing to a reduction of their contractual salary. This is a contractual arrangement between the employer and the employee, and provided it is correctly structured the tax authorities should accept it as a valid arrangement. It is potentially of benefit to both parties as it saves them both NI contributions while having the potential to save the employee income tax at the same time.
Salary sacrifice can be extended to any range of benefits and in 2008 is becoming increasingly popular in the public sector as well as for transport related benefits e.g. Cycles, Bus Travel and Low CO2 emission cars. Salary sacrifice is also commonly used to fund the introduction of Flexible Benefit Plans in the UK.
Items commonly salary packaged include:
Some companies also allow their employees to salary package other items including household utility bills, although this is complicated and normally requires the assistance of a third-party company who specialise in salary packaging arrangements.
Charities and public & not for profit hospitals can do this most effectively as they are exempt from fringe benefits tax up to a certain limit per employee (currently $9095 for public hospitals)
Salary packaged benefits in Australia generally attract Fringe Benefits Tax, with a few exceptions - some benefits are Fringe Benefits Tax exempt, including mobile phones and laptop computers.