Do you know how to salary sacrifice into super? It is a popular way to make concessional (before-tax) contributions to your superannuation.
As the name suggests, you forgo some of your regular income so that you can boost your retirement funds.
But that’s not all it does! It can also be a beneficial strategy when you want to reduce your income tax obligations and improve your overall financial position.
Today, we tell you everything you need to know about salary sacrificing and highlight the tax-saving opportunities it offers.
Salary sacrifice explained
“A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging.
It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages. This is in return for the employer providing them with benefits of a similar value.” – ATO website
As described by the ATO, a salary sacrifice arrangement sees an employer provide benefits to their employee in lieu of their regular wage. These benefits might include a car, a phone or education fees.
For example, a salary sacrifice package might include $80,000 as the wage component, then a car at $15,000, along with health insurance and childcare fees totalling another $2,500. The entire remuneration package for this employee is $97,500.
But there is also the option to salary sacrifice into super. So, instead of receiving a specific benefit for immediate use, an employer pays the sacrificed amount straight into the employee’s super fund.
What’s the benefit?
One of the key reasons that people choose to salary sacrifice is because it reduces taxable income.
Let’s consider the example above. The $80,000 wage is subject to marginal income tax rates, whereas the car, health insurance and childcare fees do not incur any tax… even though they are worth $17,500. This is highly beneficial for the employee because they end up paying a lower amount of income tax than if they simply received a $97,500 wage.
In the instance of salary sacrificing into super there are even more benefits. Yes, you reduce your taxable income – great news! But you also pay less tax on your contributions.
If you earn less than $250,000, your salary sacrifice contributions will only incur 15% tax when they are paid into your fund. This is significantly lower than most personal tax rates. If your annual earnings are greater than $250,000 the tax becomes 30%… but this is still well under the highest marginal rate of 47%.
Improved financial position
Let’s drill down into that a little bit further and look at a new example. This example is taken from SuperGuide – an independent Australian guide that comments on superannuation, retirement planning and fund performance.
Their case study is:
“Jessika is aged 45 and earns $85,000 a year before tax. She is interested in boosting her super account and potentially paying less tax, so is considering putting a salary sacrifice arrangement in place with her employer.
If she salary sacrifices $6,000 into her super, she will be $1,170 better off after-tax and she will also have more savings in her super account.
|No salary sacrifice||With salary sacrifice|
|Total salary package||$85,000||$85,000|
|Employer SG contribution ($85,000 x 10%)*||$8,500||$8,500|
|Income tax payable* (2021–22 including Medicare Levy and LITO and LMITO offsets)||$15,779||$13,709|
|Take home pay||$60,721||$56,791|
|Total super contribution (SG + salary sacrifice)||$8,500||$14,500|
|Super contributions tax (15% x super contribution amount)||$1,275||$2,175|
|After-tax super contribution||$7,225||$12,325|
|Total take home pay and after-tax super contribution||$67,946||$69,116|
*2021–22 tax, offset and SG contribution rates
While the money in her pocket today might be slightly lower, her overall financial position has improved, and her superannuation balance will grow more quickly.
Like with any financial strategy, there are always considerations to think about before making changes.
First of all, you need to be mindful of your current debt position. If you have a number of large debts you might need to review your budget before choosing this option, because salary sacrifice will impact how much money you receive in your regular pay packet.
You also need to be aware that salary sacrifice tends to be ineffective for lower income earners. If you currently earn less than $18,201 then this arrangement won’t save you anything, as you are below the taxable threshold.
Plus, any salary sacrifice into super counts towards your annual concessional contributions cap. For the financial year 2021-22 the cap is set at $27,500, so you must make sure you don’t exceed this amount, remembering that your employer’s super guarantee is also part of your concessional contributions.
If you do choose to salary sacrifice into super, the process itself is quite straightforward. You simply discuss your options with your employer and make sure you reach an agreement that you are both happy with.
The arrangement should be in place before the start of a new financial year because you cannot retrospectively activate a salary sacrifice plan. Make sure all the terms are clearly outlined and that your employer makes contributions regularly. While some employers only make their super guarantee contributions quarterly, it is better for you if your contributions are paid in line with your pay cycle – fortnightly or monthly. This way your salary sacrificed funds already start earning investment returns.
Finally, you need to make sure your super fund receives all your salary sacrifice contributions by 30 June, or they will count towards your concessional contributions cap for the next financial year.