You may have heard that by making voluntary super contributions you can increase your retirement savings, but did you know that you may also be able to reduce the amount of tax you pay?
Salary sacrificing has turned into a popular strategy for employees on middle-to-high incomes to boost their retirement savings and pay less tax all in one go.
What is salary sacrifice to super?
Salary sacrifice into your super fund means, come payday, a percentage of your wage will be sent to your super account rather than into your bank account. It is an agreement between you and your employer where a portion of your pre-tax salary is paid as an additional concessional contribution to your superannuation account.
Who are the ones that benefit the most?
This is typically a tax-effective strategy if you earn more than $37,000 a year. Instead of paying your marginal tax rate, that income will instead only be taxed at 15%. If you earn below $37,000 your income is only taxed at 19%, so it might not be worth salary sacrificing as you’d only be taxed 4% less.
What are the benefits of a super salary sacrifice?
There are a many benefits of salary sacrificing some of your pre-tax salary into super, they include:
- Investment earnings in super are concessionally taxed. This means that taxes are levied at a special rate and can contribute up to $25,000 p.a., these extra contributions are taxed at a super rate of 15%. If your income plus your before-tax super contribution is greater than $250,000 p.a. you pay 30% tax on your salary sacrifice contributions.
- You will pay less tax. If you are paying a higher marginal rate of tax on your income, you will save on the amount of tax you’re paying.
- You will boost your retirement savings. Putting more into your super now helps you build your balance faster, therefore you’ll have more money to draw on when you retire.
- Benefit from compound returns. By making extra contributions to your super from a young age, you’ll benefit from more potential investment returns over time.
What to consider before salary sacrificing into super?
- Work out how much of your income you can comfortably give up now. If you elect to send a portion of your salary to your super you’ll end up with less money in your bank account when come payday.
- Make sure your employer contributions don’t drop. Make sure your employer will continue to calculate your super guarantee payments on your gross income, before salary sacrifice.
- There are caps on the amount you can contribute to super. Pre-tax or concessional contributions cannot exceed $25,000 each financial year, this includes your employer’s 9.5% super guarantee (SG). So the amount you will be able to salary sacrifice will depend on how much you earn and the level of your annual SG contribution from your employer.
- You cannot access the money. It’s important to remember that you won’t be able to withdraw from your super until you retire or reach your preservation age, except under a few special circumstances.
Salary sacrificing into super can be a win-win for your tax bill now and your future income when you’re no longer working. However, it is important to make sure you know all the rules and have considered your options and the right strategy before you dive in.
ASIC, 2018: https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/salary-sacrifice-super
Financial Partners, 2018: https://financialpartnersblog.com.au/financial-planning/money-life-by-financial-planning-association/salary-sacrifice-a-lot-less-painful-than-it-sounds/