Salary sacrificing into super is undoubtedly one of the most tax-effective retirement planning strategies.
Let’s take a look at what salary sacrificing is, how it works, how much you can salary-sacrifice and the benefits.
What Is Salary Sacrifice?
Salary sacrificing into super involves forfeiting part of your wage in exchange for increased superannuation contributions into your account, equivalent to the amount of your wage forfeited.
The purpose of salary sacrificing into superannuation is to increase your investments held in the tax-effective superannuation environment, while simultaneously reducing your own personal income tax obligations.
How Does Salary Sacrifice Work?
If you have decided that you would like to salary sacrifice some of your wage, you should speak to your employer or the payroll office associated with the business who pays your salary.
You will need to tell the payroll office how much of your wage you would like to salary sacrifice into super each pay period.
Your employer should already have the name of your super fund and account number, because they will be making the mandatory 10% employer superannuation guarantee (SG) contributions into your account. However, if you have more than one super account, you may choose to have your salary sacrifice contributions directed elsewhere.
How Much Can You Salary Sacrifice?
Salary sacrifice super contributions count towards your concessional contributions cap. The standard concessional contributions cap is $27,500 per person, per financial year.
In order to determine how much you can salary sacrifice, you need to add up all of the expected employer SG contributions that will be paid into your account for the year and deduct that amount from the $27,500 cap. The remaining amount is how much you are able to salary sacrifice.
If you plan on making any personal contributions to super from your bank account and claiming a tax deduction for them, known as personal concessional contributions, then you will need to add these towards the $27,500 cap also.
Related article: How Much Can You Contribute to Super?
Benefits of Salary Sacrificing
There are a number of benefits associated with salary sacrificing into superannuation, including reducing your personal income tax and saving for retirement tax-effectively.
Reduced Income Tax
Salary sacrificing into super will reduce the amount of your wage that is assessable and taxed at your personal tax rate. This means you will not pay any personal income tax on the amount you salary sacrifice.
Reduced Earnings Tax
Another benefit of salary sacrificing is that you are investing more of your wealth in superannuation, which is basically Australia’s own little tax haven, because all earnings from your investments within super are taxed at a maximum of 15%. This compares to earnings being taxed at your individual tax rate if you were to invest in your own name instead.
Forced Savings (No Touching!)
Salary sacrificing is a great way of forced saving, as any amount you contribute into super cannot be accessed until certain retirement conditions are met. This can limit any urges you might have to go out and buy that Cadillac or over-priced Cavoodle.
If you own any life insurances within super, making salary sacrifice contributions can help cover the cost of these and reduce the erosion of premiums on your super balance.
Read more: Advantages of Salary Sacrificing
Risks of Salary Sacrificing
There’s a few risks that you need to be mindful of before pulling the trigger on a salary sacrifice arrangement, such as the ability to access your super, contributions tax and investment risk.
Any amount that you salary sacrifice into super is inaccessible until you meet a superannuation condition of release. Generally, you need to have at least met your superannuation preservation age before you can access it.
So, it’s important you only salary sacrifice amounts that you won’t need between now and retirement.
Missed Contributions – Check Your Statement
If you’ve put in place a salary sacrifice arrangement with your employer, you should check that they are actually making the contributions you agreed upon into your super account. This can be done by logging into your super account and checking the transactions, or calling your super fund provider.
A disadvantage of salary sacrifice contributions is that they are classified as concessional contributions and therefore incur contributions tax of 15% upon entry to your super account. The after-tax amount is then added to your balance.
If you’re a very high income earner ($250,000+ p.a.), your salary sacrifice contributions will incur an additional 15%. If you are a low income earner (less than $37,000 p.a.), you may be eligible to receive a refund in contributions tax.
Any amount you contribute to super will usually be invested and therefore exposed to market volatility and capital fluctuations. You should enquire as to how your super is invested and be sure you are comfortable with the investment risks associated.
Read more: How Much Can I Salary Sacrifice Into Super
How Much Should I Salary Sacrifice?
There are three basic rules to follow when deciding how much you should salary sacrifice.
Rule 1: Only salary sacrifice as much as you can afford. You still need to be able to cover your lifestyle expenses and any upcoming capital expenses. Remember, once it has been contributed to super, you can’t touch it again until you retire.
Rule 2: Make sure the amount you salary sacrifice doesn’t cause you to exceed the concessional contribution cap of $27,500 per financial year, unless you have the ability to utilise unused carry-forward amounts. Remember, all employer SG contributions and salary sacrifice contributions will count towards the cap.
Rule 3: Only salary sacrifice to the point that there is a financial benefit. Salary sacrificing reduces the amount taxed at your individual tax rate, but contributions tax of 15% is payable. So, usually, there is no benefit salary sacrificing an amount that takes you below the tax-free threshold, because if you’re not going to pay income tax anyway, why pay contributions tax?
Ever wondered whether you should salary sacrifice or pay down debt? This video explains all:
Salary Sacrifice Example
Let’s go through an example on how salary sacrificing works and how it can benefit you. Let’s say you earn $100,000 per year and you need $60,000 per year to cover living expenses. Your employer pays the standard 11% SG amount in addition to your wage. The table below compares a situation where you do not salary sacrifice and where you do:
|2023/24||No Salary Sacrifice||Salary Sacrifice|
|Salary Sacrifice (B)||$0||$16,500^|
|Assessable Income (A-B)||$100,000||$83,500|
|Income Tax Payable (C)||$24,967||$19,275|
|After-Tax Income (A-B-C)||$75,033||$64,225|
|Contributions Tax @ 15% (D)*||$0||$2,475|
|Total Tax Payable (C + D)||$24,967||$21,750|
|Benefit Of Salary Sacrifice||$3,217|
^This is the maximum that can be salary sacrificed due to receiving $11,000 ($100,000 x 11%) in SG contributions, leaving $17,000 before reaching the $27,500 concessional contributions cap.
*Excludes contributions tax on the SG contributions.
You can see in both scenarios in the table above, you still have sufficient after-tax income to cover living expenses of $60,000. However, you have significantly reduced tax payable for the year via salary sacrificing into super. The only catch? You can’t touch it until you retire.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Salary Sacrifice Calculator
Feel free to use this salary sacrifice calculator to see the maximum amount you are able to salary sacrifice, based on your wage and the salary sacrifice limits.