Salary sacrifice to super, how does it work?
By Luke Kidd
Salary sacrifice is one of the most common strategies used amongst wage-earners seeking to boost their super prior to retirement. If you aren’t sure of what salary sacrifice is or how it works, here’s a quick explainer.
What is salary sacrifice?
Salary sacrifice super contributions are a tax-effective way to contribute extra money to your superannuation account. Essentially, salary sacrificing means you ask your employer to redirect a portion of your pre-tax salary directly into your super fund, instead of receiving it as cash in your bank account.
How does it save tax?
This is a tax-effective way to save for retirement because the money your salary sacrifice to your super is taxed at a lower rate than your normal income tax rate.
For example, Let's say you earn a salary of $80,000 per year and decide to salary sacrifice $10,000 to your superannuation account. Here's how it could save you tax:
Without Salary Sacrifice:
Your taxable income would be $80,000 per year.
Your income tax (excluding Medicare Levy) in 2022/23 would be approximately $18,067
Your take-home pay would be approximately $61,933.
With Salary Sacrifice:
Your taxable income would be reduced to $70,000 per year ($80,000 - $10,000).
Your income tax (excluding Medicare Levy) in 2022/23 would be approximately $14,617.
Your salary sacrifice contributions would be taxed at 15% ($1,500).
Your take-home pay would be approximately $55,383.
In this example, by salary sacrificing $10,000 to your super, you would save approximately $3,450 in income tax and $1,950 in tax overall. Your take-home pay reduces by $6,550, however your super balance has increased by $8,500.
It's important to note that everyone's tax situation is different, and the actual amount of tax savings you could achieve by salary sacrificing will depend on a range of factors, including your income level, the amount you choose to salary sacrifice, and your personal tax rate.
What are the limits?
The 2022/23 concessional contribution cap is $27,500 per financial year, which includes both employer and employee contributions such as salary sacrifice.
It's important to note that the money you contribute through salary sacrifice cannot be accessed until you meet a condition of release, such as reaching preservation age (between 55 and 60, depending on your birth date) and retiring from the workforce or reaching age 65.
How do personal deductible contributions work?
If you prefer not to have regular deduction from your pay-packet, you can consider making a personal contribution to super and claiming a tax-deduction. This can deliver the same tax savings as salary sacrifice and can be more effective for members who wish to accurately target their concessional super contribution for the financial year.
This strategy requires a few extra steps as you must lodge a valid notice of intent to claim a tax-deduction with your super and include the deductible contribution in your tax return for that financial year. Members should exercise caution in this approach as you will not be able to claim a valid tax deduction if a rollover or withdrawal is made from your account after making the contribution.
How can an adviser help?
A financial adviser can be a valuable resource in helping you navigate the process of salary sacrificing to super. Here are some ways we could assist you:
Determine how much to contribute: Helping you work out the optimal amount to contribute based on your financial goals, income, and superannuation balance.
Advise on tax implications: Salary sacrificing to super can have tax implications, and we can help you understand how this may affect your overall tax situation.
Choose an appropriate super fund and investment strategy: Our process can assist you in selecting a suitable super fund to ensure your contributions are being invested appropriately, and in line with your long-term financial goals and investment risk profile.
Monitor and adjust your strategy: Over time, your financial goals and circumstances may change, so it's essential to review and adjust your super contributions and investment strategy accordingly. A financial adviser can help you stay on track and make any necessary adjustments to keep you on target.
Salary sacrificing to superannuation can be a smart financial decision for many working Australians to reduce tax and increase their retirement savings. If you're considering salary sacrificing to super, don't hesitate to contact us today to schedule a cost and obligation free consultation to discuss your options around implementing a salary sacrifice strategy.
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)