Australian residents have the option to salary sacrifice their superannuation contributions.
Salary sacrificing superannuation is an arrangement where you agree to forgo part of your salary in return for your employer making additional contributions to your super fund. The main advantage is that it can reduce your taxable income, which may put you in a lower tax bracket and result in a tax saving.
Contributions made this way are generally taxed at a lower rate than if they were made from your after-tax income, so salary sacrificing can be a great way to supercharge your retirement and superannuation planning.
However, salary sacrificing isn’t right for everyone. Before you decide to salary sacrifice into super, it’s important to understand how it works and whether it’s the best way to boost your retirement savings.
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What is Salary Sacrificing?
Salary sacrificing is an arrangement with your employer where you agree to forgo a portion of your salary in return for benefits of a similar value. The benefits can include goods and services like a car or laptop, or voluntary contributions to your superannuation account.
Essentially, an employee agrees to receive less take-home pay from their employer in return for benefits. These benefits are paid out of the employee’s pre-tax salary, which means they don’t have to pay income tax on them.
ATO regulations on salary sacrificing don’t place any restrictions on what kind of benefits can be involved in a salary sacrifice arrangement. Common options include:
- Superannuation: Contributions made directly to a superannuation fund.
- Fringe benefits: This includes loan repayments, property, vehicles, childcare and education costs.
- Exempt benefits: This includes work-related items such as phones and laptops, software, work-related protective equipment, and other items used in the course of your employment.
What is Salary Sacrificing Superannuation?
Salary sacrificing superannuation involves having part of your salary paid into your superannuation fund rather than into your bank account. This allows you to save for retirement while reducing your taxable income, as the contributions are made before tax is deducted.
The main benefit of salary sacrificing into super is that the money is taxed at a lower rate than if it had been paid into your after-tax account. For example, if you’re in the 37% tax bracket and you receive $1,000 in after-tax pay, you’ll only have $630 left after income tax is deducted.
However, if that same $1,000 is contributed to your super fund as a salary sacrifice contribution, the tax on those contributions will only be 15%. This means you’ll have $850 in your super account rather than $630—a difference of $220.
To take advantage of this arrangement, you need to be eligible to contribute to super and your employer must offer salary sacrifice arrangements.
When considering superannuation for future planning, salary sacrificing arrangements are one of several tools available for Australians to maximise their retirement savings.
How Does Salary Sacrificing Super Work?
When you salary sacrifice super, your employer agrees to route part of your pre-tax wages into your super account instead of paying it to you as cash income. The amount of money you sacrifice is deducted from your wages before income tax is applied.
Does Salary Sacrificing Super Reduce Taxable Income?
Yes, since salary sacrificed super contributions are made by your employer on your behalf, they aren’t counted as part of your taxable income for the financial year. This means they can reduce your taxable income and enable you to pay a lower tax rate.
For example, let’s say that you earn $100,000 per year and you decide to salary sacrifice $10,000 into super. Your taxable income will now be $90,000 ($100,000 – $10,000) and you will pay less income tax as a result.
How Much Tax do you Pay on Salary Sacrifice Super?
When income is salary sacrificed to your superannuation fund, a tax rate of 15% applies rather than your personal income tax rate.
The amount of money you save on tax will depend on your marginal tax rate; typically, the higher your marginal tax rate, the greater the tax saving from salary sacrificing into super.
Pros & Cons of Salary Sacrificing Superannuation
While salary sacrificing superannuation does reduce your take-home pay, there are also plenty of benefits. Learn more about the pros and cons of salary sacrifice arrangements below.
What are the Advantages of Salary Sacrifice Super?
The benefits of salary sacrificing superannuation include:
- Contributions are made on a pre-tax basis, so you save money on your taxable income.
- The sacrificed amount is not counted as assessable income for tax purposes, meaning you don’t pay any PAYG withholding tax on it.
- Contributions are taxed in the super fund at a maximum rate of 15%, which is generally less than your marginal tax rate.
- You can generally contribute more to your superannuation if you salary sacrifice than if you simply make voluntary contributions.
- Salary sacrificing may help you to reach your retirement savings goal sooner.
- Tax benefits over investment as earnings within a superannuation fund are taxed differently.
What are the Disadvantages of Salary Sacrifice Super?
While there are some clear benefits to salary sacrificing into super, there are also some potential negatives that you need to be aware of before making the decision to do so.
- By salary sacrificing into super you’re effectively reducing your take-home pay. This could leave you struggling to cover day-to-day expenses or make ends meet
- Any money that you salary sacrifice into super is generally locked away until you reach preservation age. This means that if you do need access to the funds before then, you may be faced with significant penalties.
- While the tax on contributions may be lower when using salary sacrifice, the overall rate of return on investments within super is often lower than what could be achieved outside of super.
- Your employer is not obliged to accept your request for salary sacrifice, and can impose limits on how often you can renegotiate the terms of the arrangement
- Higher tax rates and penalties apply if you exceed the concessional contributions cap
- Like any investment, there is always some risk involved in superannuation funds which can cause value to fluctuate
- Few benefits for low income earners, as no income tax applies under $18,201 p.a., and the tax savings may not be worth it with an income under $45,000
Should I Salary Sacrifice Superannuation?
Before making the decision to salary sacrifice, there are a few things you need to consider.
Firstly, salary sacrificing will reduce your take-home pay, so you need to make sure that you can afford the reduced wage.
Secondly, salary sacrificing is a long-term commitment; once you enter into an agreement with your employer, it can be difficult to change or cancel the arrangement.
Finally, salary sacrificing may not be suitable if you are close to retirement or if you are already receiving a government pension or benefit.
Salary sacrificing can be a useful way to minimise taxes. For example, if you earn $80,000 per year and salary sacrifice $10,000 into super, you would only pay tax on $70,000. This could save you thousands of dollars each year.
Salary sacrificing could also help you to participate in the First Home Super Saver Scheme. This scheme allows you to save up to $30,000 for a home deposit inside superannuation.
Salary sacrificing can help to boost your retirement savings. By contributing more money to superannuation, you can potentially receive a larger pension or retirement income in the future.
If you’re careful not to exceed your concessional contributions cap and won’t need access to the funds, it can be a cost-effective way to save for retirement.
How Much Should I Salary Sacrifice?
There is no limit to how much salary you can sacrifice, unless restricted by your employer. However, you’ll want to make sure you stay under the concessional contributions cap for the financial year.
To determine how much salary you should sacrifice into super, you need to calculate your taxable income and work out how much of your income is from concessional sources. This will help you to identify how much you can contribute without exceeding the concessional contributions cap or attracting Division 293 tax. This applies if your income is over $250,000 p.a., including concessional super contributions.
How Much Salary Can I Super Sacrifice in 2022?
The concessional super contributions cap for 2022 – 2023 is $27,500. This means that you can’t contribute more than this amount per year or tax penalties will apply, unless utilising carry-forward unused concessional contributions.
Note that salary sacrifice contributions aren’t the only thing that counts toward the concessional contributions cap.
Other contributions that count toward your concessional contributions cap include:
- compulsory superannuation guarantee contributions
- super contributions from any other jobs in the 2022-2023 financial year
- any after-tax contributions for which you claim a tax deduction
Carry-forward unused concessional contributions can enable you to use unutilised caps from the previous five years on a rolling basis, starting from 2018-2019. Eligibility conditions apply, so your financial advisor can let you if carrying forward contributions caps is an option for you.
Should I Salary Sacrifice Super Before or After Tax?
Salary sacrificed superannuation contributions always come from your pre-tax income.
At What Income is Salary Sacrifice Worth It?
Salary sacrificing superannuation is most effective for mid to high income earners. This is because the higher your income tax rate is, the more you stand to save by making pre-tax super contributions.
If your income is over $45,000 and you pay at least 32.5% income tax, having your superannuation contributions taxed at 15% offers significant savings.
Low income earners will see little benefit as no income tax applies to earnings under $18,201 p.a. With only a few percentage points in tax savings, anyone with an income under $45,000 should carefully consider whether salary sacrifice is right for them.
What’s the Difference Between Salary Sacrifice Super and Voluntary Contribution?
Salary sacrificing superannuation occurs pre-tax, so it reduces your taxable income. Voluntary super contributions come from your post-tax income.
However, one thing to consider is that if your total assessable income is below the threshold, making after-tax contributions can qualify you for the government co-contribution. This isn’t the case with voluntary super contributions after tax.
Not all employers will offer salary sacrifice arrangements, but anyone can make voluntary superannuation contributions.
How Much Can I Put Into Super in a Lump Sum?
For the 2022 – 2023 financial year, Australians can put up to $110,000 into super in a lump sum, which is the general non-concessional contributions cap. If the bring-forward rule applies, you may be able to contribute up to $330,000.
This is separate to the concessional contributions cap, which applies to pre-tax contributions such as the superannuation guarantee and salary sacrificing.
However, making lump sum contributions from your post-tax income won’t reduce your taxable income the way that salary sacrificing will. Be sure to check with your financial adviser first to find out if voluntary lump sum contributions or salary sacrificing superannuation is better for your needs.
This also doesn’t include downsizing contributions for those over 60 years of age.
How Do I Set Up a Salary Sacrifice Arrangement?
First, speak to a financial advisor to find out if salary sacrificing superannuation is the right option for you. You’ll then need to speak to your employer to negotiate the arrangement.
If you want to salary sacrifice into super, you’ll effectively need to negotiate a new salary arrangement with your employer. This may involve trade-offs, such as agreeing to forgo a pay rise or other benefits in return for your employer making extra contributions to your super.
Once you’ve agreed on a new salary, your employer will make the required deductions from your pay before taxation and contribute those funds to your super fund on your behalf.
It’s always a good idea to have a written and signed agreement in place rather than relying on verbal agreement. You’ll also want to make sure you’re using a complying super fund, as not all funds are eligible.
Is Salary Sacrificing Right For Me?
The decision to salary sacrifice should not be taken lightly; it’s a long-term commitment that can have implications for your take-home pay and retirement savings.
Here are some things to consider before making the decision to salary sacrifice:
- Can I afford the reduced take-home pay?
- Is salary sacrificing right for my stage of life?
- Do I need the money now or can I afford to sacrifice it into super?
- How will salary sacrificing affect my take-home pay and lifestyle today and in retirement?
- How could this decision affect my ability to access government benefits?
If you’re still not sure if salary sacrificing is right for you, speak to a financial adviser who can help assess your personal circumstances and provide advice tailored specifically for you.
Salary sacrificing into super can be a great way to boost your retirement savings while reducing your taxable income. However, it’s important to understand how salary sacrificing works and consider all the implications before making the decision to do it.
It’s important to remember that while the tax on contributions may be lower when using salary sacrifice, the overall rate of return on investments within super is often lower than what could be achieved outside of super.
Overall, salary sacrificing could be a great way to grow your retirement savings but it’s not right for everyone. If you’re still unsure if salary sacrificing is right for you, speak to a financial adviser who can help assess your personal circumstances and provide tailored advice.
This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory Private Clients makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.
Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).
Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.