In this article, we explore the option of using pre-tax salary to boost superannuation, which is a common strategy also referred to as “salary sacrifice”. Despite its ominous name, ‘sacrificing’ your salary isn’t as scary as it sounds and making contributions is a good way to boost your nest egg, so you can have more money to enjoy in retirement.
What is salary sacrifice?
Put simply, salary sacrificing is a pre-tax contribution from your income to your super account. There are two main reasons why people salary sacrifice part of their salary to super. The first is that they might save tax if their tax rate is higher than the contributions tax rate. This suits higher income earners because it’s taken directly out of your salary before you’ve paid income tax, with the super is taxed at 15%, not your marginal tax rate (which could be up to 49%). The second is they wish to boost their savings for retirement in a tax-effective environment. This can suit higher income earners due to their higher marginal tax rate and means potentially paying less tax. And if you contribute the tax saving into your super, you could end up having more going into your super, but still keeping the same take home pay.
Things to be aware of:
Due to the way income tax is structured, salary sacrificing generally only makes sense from a tax perspective if your marginal tax rate is over 15%. Just keep in mind that salary sacrifice contributions are counted towards the concessional contributions cap, and they’re included when calculating your total income for super co-contribution purposes and for other government benefits.
So, how does salary sacrificing work?
First, you could look at your income and expenses, and work out how much of your income you could comfortably give up now, and invest for your retirement.
Then you would arrange with your employer to regularly redirect that amount of your wage to your super account instead of your bank account or paycheck. This must be in writing. For more information about how to set up a salary sacrificing agreement with your employer, visit ASIC’s MoneySmart “Contributing Extra to Super” page.
The Australian Taxation Office will then treat that portion of your income differently for tax purposes – that is, you only pay 15% tax on that sacrificed amount compared to your normal marginal tax rate which in most instances is considerably higher. If you earn more than $300,000, your contributions will be taxed an additional 15%.
There are limits on how much you can contribute into your super, and those limits may vary depending on how much money you earn, and your age. Now this doesn’t take into account your personal situation, so you’ll need to consider your own circumstances before making investment decisions, so talk to your financial adviser today.
How much can I salary sacrifice?
To prevent high-income earners from using salary sacrificing as a way of avoiding lots of tax, there is a limit on the amount you can contribute each year. These superannuation contribution limits are known as concessional contributions caps. Here are the guidelines:
- You can salary sacrifice up to the annual limit for pre-tax contributions to superannuation
- The annual limit includes the 9.5% compulsory super contribution paid by your employer
- If you’re not yet 50, a maximum of $30,000 in total pre-tax contributions applies
- If you are 50 or over, the maximum pre-tax contribution up to $35,000 in 2015/16
- Any amount above the maximum pre-tax contribution will be subject to the normal tax rate, not the concessional 15% rate
Contributing extra to super can really boost your super nest egg. But make sure you know all the rules and consider the different ways specific for you to contribute more to super before you dive in. Start by contacting your financial planner today. If you’d like to read more articles like this one, head over to our blog.
 1. If your adjustable tax income (income plus any other income and losses you declare) is more than $300,000 a year, you’ll pay 30% tax on some or all of your contribution.
 2. This rate includes the 2% Medicare levy and the 2% Temporary Budget Repair levy.
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances.
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