Salary sacrificing into your super is a strategy some Australians use to increase their retirement savings. While it can offer tax advantages, it is important to understand how it works and the rules surrounding it. This article provides an overview and links to official government resources. It is not personal financial advice.
What is Salary Sacrifice?
Salary sacrifice is an arrangement between you and your employer where you agree to pay part of your pre-tax salary into your super fund. These contributions are generally taxed at a lower rate than your regular income, which can make it a tax-effective way to save for retirement.
Employers usually deduct the sacrificed amount from your pre-tax salary and deposit it directly into your super fund. The standard employer contributions (Superannuation Guarantee) continue alongside any salary sacrifice contributions.
Tax Considerations
One of the main benefits of salary sacrificing is the potential tax advantage. Contributions made through salary sacrifice are taxed at a concessional rate of 15% within the super fund, which is often lower than your marginal income tax rate.
It is important to note that there are annual limits on concessional contributions. Exceeding these limits can result in additional tax. For detailed guidance, refer to the ATO Salary Sacrifice guide.
Example: Understanding Salary Sacrifice
To illustrate how salary sacrifice works, consider a simplified example:
- Annual pre-tax salary: $80,000
- Employer SG contribution: 11% (for example purposes) = $8,800
- Employee chooses to salary sacrifice $5,000 into super
Without salary sacrifice, the $5,000 would be taxed at the individual’s marginal tax rate (e.g., 32.5% plus Medicare levy). By salary sacrificing, the $5,000 goes directly into super and is taxed at the concessional rate of 15%.
Effect: The employee reduces their take-home pay less than the full $5,000 because of the lower tax on the contribution, while increasing retirement savings.
Note: This is a simplified example for understanding only. Individual outcomes vary depending on salary, tax brackets, and contribution caps.
Things to Keep in Mind
- Contribution caps: Ensure you do not exceed the concessional contributions cap, which includes both employer SG and salary sacrifice contributions.
- Impact on take-home pay: Salary sacrificing reduces your immediate take-home pay, so make sure your budget can accommodate the change.
- Other obligations: Consider your overall financial situation, including personal debt and short-term savings needs, before committing to salary sacrifice.
Salary sacrificing is optional, and not all employers offer this arrangement. If you are considering it, discuss your options with your employer and consult official resources.
Staying Informed
Your superannuation and contribution rules can change over time. Staying informed through reputable sources such as MoneySmart Superannuation and the ATO will help you understand your options and any updates to legislation.
Salary sacrificing into super can be an effective tool for long-term retirement planning. By understanding the rules, limits, and potential tax benefits, you can make informed decisions to help grow your retirement savings. Always consult official sources and consider speaking with a qualified professional if you need advice specific to your situation.