Salary sacrifice is way you can minimise the tax you pay, while you build your super. A double win!
It works by having some or your salary removed (sacrificed) by your employer and paid straight to your super before it is taxed and before your salary is paid to you.
You’ll need to check that your employer is open to salary sacrifice, not every business is happy to do this for you as there are administrative costs and burdens associated.
WHAT ARE THE ADVANTAGES OF SALARY SACRIFICE?
By having the money taken from your pre-tax salary, you could lower your taxable income. Tax is paid on super contributions but only at 15% (30% for those earning over $250,000). This is significantly less that most marginal tax rates meaning you could pay less tax.
And the other benefit? Growing your super! With more money going into your super, and compound interest, over time, your retirement funds will grow to help you have the retirement you want.
SALARY SACRIFICE CALCULATOR
We recommend this calculator to work out how much you can contribute.
We used this calculator to work out what would happen if someone earning $100,000 per year were to sacrifice $100 per fortnight.
As you can see in this example, by paying more into super, the take home pay is more and the tax payable is less. Please note, this may not always be the case and you should do your own calculations before you start making salary sacrifice contributions.
WHAT ARE THE DISADVANTAGES OF SALARY SACRIFICE?
Depending on how much sacrifice, you may find that your pay is a little less than it was. Be sure to calculate how much you can afford to miss each pay cycle before you commit to a regular contribution. Also, check with your employer, as you may be able to make a one-off payment if you can’t commit to ongoing contributions.
You are losing a little bit of money to tax however, this is still less than your marginal tax rate. The contribution to super will be taxed at 15%. As an example, if you salary sacrificed $10,000 per year, only $8,500 would be added to your super.
Once the money is in super, you can’t get it back until you’ve reached retirement age. There are some ways to access super early but generally, you won’t be able to withdraw the funds unless you meet a condition of release.
There is also a chance your employer may pay less into your super. Some employers will use the post-sacrifice amount of your salary to base their super guarantee payments on. Check your contract and contact your HR or payroll team to confirm if this will happen. Also check your calculations, you may still end up paying more into your super even with the reduction.
You can’t salary sacrifice on money earned in the past. It is only available to future payments.
WHAT SHOULD I CONSIDER?
Be aware of the concessional (pre-tax) caps on super, this is currently $27,500 per year. Both the salary sacrificed amount and the employer super guarantee payments will count as concessional contributions. Any amount received into your super over the cap will incur a tax, usually your marginal tax rate rather than 15% super rate.
Can you live without the money now? Salary sacrifice may not be the best option for lower paid workers or for those living pay day to pay day.
And finally, consider that you could be making your retirement all that much more financially secure. A little sacrifice now could lead to a much happier future.
CONCLUSION
If you would like to start salary sacrificing, contact your payroll or HR team and firstly ask if they can do this for you. Think about how much you want to sacrifice – think about how much you need in your take home pay and don’t forget the contribution cap limit. Then notify your employer this is what you want to do.
By adding extra to your super now, the money you have available to fund your retirement will grow. You really are helping future you live a better retirement life. Talk to us if you have any questions about salary sacrificing.
It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.
