What does salary sacrifice mean?
Salary sacrificing is essentially a savings strategy designed to minimise your tax bill. It involves an arrangement with your employer to receive less of your taxable income in return for benefits of similar value.
These benefits can include the purchasing of a car, phone or other goods or services that you may be paying for anyway.
Salary sacrificing into your super is a common form of this strategy which involves voluntarily contributing a portion of your pre-tax income into your superannuation, over and above the 10 per cent you legally must receive from your employer.
This strategy reduces your pre-tax income and therefore reduces the amount of tax you pay at tax time.
How does salary sacrificing into your super work?
Salary sacrificing starts with an employee formally asking their employer to redirect part of their before-tax income directly into their super.
By foregoing a portion of your income in the short-term, salary sacrificing will allow you to build a substantial nest egg in your super fund, whilst paying less tax on the money you make.
This is because contributions into your super are taxed at a concessional tax rate of 15 per cent, capping out at maximum contribution of $27,500 per year.
To see how this works, let’s say you make a $100,000 pre-tax income, with your employer contributing an additional 10% into your super.
Based on current tax rates, you will be paying $5092 plus 34.5c (including the Medicare levy) for every dollar you make above $45,000. After tax, this will leave you with an annual income of $75,033 and a super contribution of $8500, totalling $83,533.
But, if you choose to salary sacrifice an additional $10,000 of your pre-tax income, you will only be paying 15% ($1500) tax on that contribution.
This means that you will have made a net contribution of $17,000 to your super (including the contribution from your employer) at the end of the year. With your pre-tax income now $90,000, you income after tax will work out to be $68,483, which totals $85,483 when you include the super.
Comparing these two strategies together, salary sacrificing will have saved $1950 of your total income from going to tax.
If you are looking to make your own calculations on how much salary sacrificing could save you on income tax, you can use our income tax calculator here.
Can I make personal contributions to my super from my after-tax income?
In short, yes you can.
Since 2017, almost all tax-payers can make a voluntary after-tax super contribution, also known as a non-concessional contribution, which can have the same benefits as salary sacrificing.
Non-concessional contributions are when an employee chooses to add to their super using their after tax income, without needing to involve their employer.
Whilst you will still be paying the 15 per cent concessional tax rate on these contributions, some of these contributions are tax deductible which will allow you to offset tax lost from your income.
To do this, you will need to lodge a notice of intent form with your super fund when making your contribution, which they will acknowledge in writing.
You must then have this paperwork ready when preparing and lodging your tax return to confirm your super fund is aware of your intention to claim these contributions as tax deductible.
These after-tax super contributions will count toward your annual concessional contributions cap of $27,500, meaning that contributions after this amount are not subject to tax benefits.
Is salary sacrificing a worthwhile strategy?
Whether or not salary sacrificing is a worthwhile strategy for you will depend on your objectives.
Obviously, allocating an additional portion of your income for your super means you forgo having that money in the short-term.
The decision should come down to your level of disposable income and whether you can afford to reduce it in favour of a long-term strategy.
Because of this, salary sacrificing is generally most effective for middle to high-income earners who pay higher rates of tax and have greater flexibility with their week-to-week earnings.
In general, growing your super can be a great long term investment because it removes the temptation to spend that money along the journey.
When formulating an investment plan to set you up for the years and decades to come, it’s important to weigh up the costs and benefits of your chosen strategy.
If part of your strategy involves growing a substantial superannuation to last you through retirement, then it is crucial that you take your time deciding which super fund is right for you.
A higher risk/reward approach might be more suitable for younger workers, while those closer to retirement age may opt for safer returns to ensure the health of their super.
If your strategy involves investing your disposable income, salary sacrificing can limit your capacity to do so in the short-term.
Keep in mind, however, that any income made from these investments will generally be taxed at your ordinary income tax rate. Meanwhile, the earnings from your super are only subject to the fees associated with your chosen fund.
If one of your objectives is to buy your first home, then consider utilising the First Home Super Saver scheme to build a deposit.
First Home Super Saver scheme
The First Home Super Saver (FHSS) scheme is an initiative designed to reduce pressure on housing affordability.
It enables you to save up for your first home inside your super fund, whilst utilising the concessional tax benefits of superannuation.
Under the scheme, you can voluntarily contribute up to $30,000 (a maximum of $15,000 per year) into your super, which can then be taken out and used to put down a deposit when buying your first home. In July 2022, the maximum retrievable amount will be lifted to $50,000.
These contributions include any made by salary sacrificing, or any voluntary non-concessional contributions that you make after tax.
It’s important to note that you cannot retrieve the super guarantee contributions that have been made by your employer, only the voluntary contributions that you have made on top of that.
Eligibility for the scheme is determined by the following factors:
- The home you purchase must be located in Australia
- You must not have previously owned a property
- You must be at least 18 years of age, although you can make eligible contributions before this age
- You must not have previously made a FHSS release request
- You must occupy the premises you buy, or intend to as soon is practicable
- You must intend to occupy the property for at least six months within the first 12 months that you own it, after it is practical to move in
For more information regarding salary sacrificing or government schemes that can benefit your super, we recommend talking to your accountant or visiting the ato website.