Five Q&As about employers contributing extra to KiwiSaver, at no cost to them:
- An employee can take advantage of this in more than one job.
- Employers are reimbursed for voluntary as well as compulsory contributions.
- Why even mean employers might go along with it.
- Employers can contribute any amount.
- How salary sacrifice works, and how higher employer contributions can boost it.
QI read with interest your article in the Herald two weeks ago about asking one’s employer to provide the maximum $1,043 KiwiSaver contribution from 1st April, even if it exceeds their 1 per cent contribution, since the government will reimburse them up to $1,043.
I have a full-time job and a part-time job and have registered for KiwiSaver with both jobs. I rang and asked Inland Revenue if the government would reimburse both my employers, up to $1,043 for each job. After some consultation I was told, “Yes, they would.” I hope you have not heard anything to the contrary.
AIt’s your lucky day. Inland Revenue confirms: “If a person is making contributions from multiple jobs, then each employer can claim their employer tax credit against their compulsory employer contribution.”
You’re in for a double bonus, if your employers go along with it. Depending on your situation, you might end up with quite a few hundred dollars extra in your KiwiSaver account.
Note, though, that each person can get only one $1,000 kick-start and one member tax credit, up to $1,043 a year.
QIn your recent article you said that employers are able to claim their rebate on both the voluntary and compulsory portions of their contributions to KiwiSaver from 1 April, to a maximum of $20 a week. Our advisor has given us the same advice.
However, if you contact the IRD they are adamant that the rebate only applies to the compulsory portion, i.e. 1 per cent for 12 months from April 2008. Our employer contribution is 4 per cent. Can we claim the $20 per week?
AThis time it seems Inland Revenue gave the wrong info. But again it’s good news. The official word: “The employer tax credit applies to both voluntary and compulsory portions of the employer’s contribution to an employee’s KiwiSaver account.”
QIn regards to your challenge two weeks ago to employers to chip in the $20 weekly to employees, at no cost to employers — I’m afraid the sun will freeze over first. Employer associations are too mean to even contemplate advising their members to do so.
It’s not going to happen at my workplace that’s for sure. However there’s no harm in asking, so that’s what I’ll do.
AYou might be pleasantly surprised. The New Zealand labour market is extraordinarily tight, with our current 3.4 per cent unemployment rate the lowest since the Household Labour Force Survey began in 1986.
That means it’s hard for many employers to find good workers, so it pays to treat their employees well. Two of today’s Q&As suggest at least some employers are keen to do the decent thing.
I should add, though, that in some cases paying the extra money will be administratively tricky. So ask nicely. Let me know how you do.
QDoes the employer contribution to KiwiSaver have to equal 1 or up to 4 per cent, or can a dollar amount be nominated by the employer?
For example, can an employer nominate $1043 per year when this amount is more than the compulsory 1 per cent but may not equal 2 per cent? As an employer I am just trying to maximise the subsidy for our employees.
Obviously this only works for the 2008–09 financial year.
AAn employer can contribute any amount to an employee’s KiwiSaver account, as long as it is at least the compulsory amount.
But it’s not correct that this works only this coming year. It will keep working for several years for lower paid employees.
In 2009–10, for example, employers will have to contribute 2 per cent of pay. For employees earning more than $52,000, 2 per cent of their pay will be more than $1,043. But for everyone on lower pay, it would be good if you contribute $1,043 — which for them will be more than 2 per cent.
In 2010–11, the compulsory contribution is 3 per cent and the salary cutoff point is $34,767. And from April 2011, the compulsory contribution is 4 per cent and the salary cutoff is $26,000.
However, the situation is a little trickier with employees who earn less than $26,000, because of withholding tax complications.
One of the advantages of KiwiSaver is that employers don’t have to make Specified Superannuation Contributions Withholding Tax (SSCWT) payments on their contributions — up to a maximum contribution of 4 per cent of each employee’s pay or the employee’s contribution, whichever is less.
For people earning less than $26,000, $1043 is more than 4 per cent of their pay. So any money an employer contributes above 4 per cent will be subject to withholding tax. That means the employee will receive less.
It’s still free money from the government, but some employers might baulk because of the hassle, and prefer to limit their contribution to 4 per cent of pay.
QI read your comments about the ‘bonus’ for employees if they can persuade their employer to pay $1043 rather than the compulsory 1 per cent.
I wondered whether this may affect salary sacrifice? At the moment I am paying the 4 per cent employee contribution, and the 4 per cent employer contribution is being deducted by my employer from my salary.
In April I planned to reduce this to 4+3 per cent as the 1 per cent employer contribution kicks in. Should I continue with this if my employer agrees to give me more, up to $1043, because of what you outlined?
AIt’s good to know you are taking advantage of salary sacrifice to save more for your retirement. More on that in a minute.
But first, your question. It would be great if your employer is willing to contribute $1043 a year to your KiwiSaver account from April 1, knowing the government will reimburse them.
You can then salary sacrifice whatever amount is needed to get the total employer contribution up to 4 per cent of your pay. That will leave more in your pocket — and the same total amount in your KiwiSaver account — as compared with your current plan.
The only exceptions to this would be if you:
- Earn $26,000 or less a year. See the point made in the above Q&A about withholding tax. Your employer might stop at 4 per cent of your pay, rather than topping it up to $1043.
- Earn more than $104,000 a year. In this case, your employer’s compulsory 1 per cent contribution will be more than $1043, so they will have to contribute that higher amount anyway.
For the benefit of others, salary sacrifice works for any employee in KiwiSaver — although the higher your pay the more you gain. While you have to be able to negotiate how you are paid, it won’t cost your employer anything except administration.
With salary sacrifice, you receive the same total pay, but you switch some of it from “in your hand” to “in your KiwiSaver account” — over and above your 4 per cent KiwiSaver contributions.
The drawback is that you don’t have the money to spend now — although some people who lack will power might see that as an advantage!
The benefit is a tax break. Because of the exemption from withholding tax outlined above, money from the employer goes into your KiwiSaver account tax-free. In the hand, you would have paid anything up to 39 per cent tax on it. You also save a little by not paying ACC levies on the money that you “sacrifice”.
For salary sacrifice to work, you must keep contributing your own 4 per cent, and not take contributions holidays. The situation changes each year:
- In April 2008 to April 2009, your employer has to contribute 1 per cent to your KiwiSaver account anyway. With salary sacrifice, the employer puts in 3 per cent more out of your pay packet — in addition to the 4 per cent you are already contributing.
That 3 per cent won’t be taxed. If you earn $50,000, the tax break is worth about $500. On $100,000 it’s worth about $1,200.
- In 2009–2010, your employer has to contribute 2 per cent anyway. You ask your employer to put in 2 per cent more out of your pay packet.
- In 2010–2011, your employer has to contribute 3 per cent anyway. You ask your employer to put in 1 per cent more out of your pay. By now, the tax break is worth about $60 if you earn $50,000, and $390 if you earn $100,000.
- From April 2011, your employer has to contribute 4 per cent of your pay — the maximum amount that can be exempt from SSCWT. This is the end of salary sacrifice in connection with KiwiSaver. However, people in some situations can continue to gain from it. The payroll people at your work may have information on this.
Is salary sacrifice worth the hassle? Many people would say that the dollars gained don’t amount to much, particularly for those on lower incomes. But if your employer makes it easy, and you can cope without the cash in hand, go for it.
As our correspondent has pointed out, you can do even better if your employer will contribute $1,043 a year.
A warning, though. If you choose to take less in salary, that can lead to reductions in other employee benefits, such as life insurance, or bonuses based on pay or your ACC coverage.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.