Salary sacrificing into superannuation involves directing a portion of your pre-tax income into your super fund. This can help you boost your retirement savings while potentially reducing your tax liability. If you’re considering this strategy, here’s a guide to understand how it works and what you need to know.
What is Salary Sacrificing into Super?
Salary sacrificing into super means you agree to have part of your before-tax income paid directly into your superannuation account by your employer. This contribution is in addition to the compulsory Super Guarantee contributions your employer must make, which are currently at least 11.5% of your earnings (assuming you’re eligible).
While salary sacrificing reduces your take-home pay, it can be a valuable tool for building your retirement savings. Additionally, salary sacrifice contributions are taxed at a lower rate, which may help reduce your overall tax bill.
How Much Super Do You Need?
According to the Association of Superannuation Funds of Australia (ASFA), to fund a comfortable retirement, individuals aged around 65 would need an annual budget of approximately $51,630, while couples would need $72,663 (assuming they own their own home). For a modest lifestyle, which is considered better than living solely on the Age Pension, individuals would need around $32,915, and couples would need $47,387 annually.
Contribution Limits
You can choose how much you want to contribute to your super via salary sacrifice, provided you don’t exceed the concessional contribution caps. The concessional contributions cap is set at $30,000 per year for individuals under 50, or $35,000 if you’re 50 or older.
Remember, the cap includes all concessional contributions, not just those made through salary sacrifice. This means the following contributions count toward the cap:
- Employer-paid Super Guarantee contributions.
- Any personal contributions you make and claim a tax deduction for (e.g., after-tax contributions you choose to deduct in your tax return).
Exceeding the cap can result in extra tax penalties, so it’s important to monitor your contributions closely.
Tax Benefits of Salary Sacrifice
One of the main advantages of salary sacrificing into super is the potential for tax savings. Contributions made via salary sacrifice are taxed at just 15%, significantly lower than most people’s marginal income tax rate. However, if you earn over $250,000, you will pay a higher tax rate of 30% on salary sacrifice contributions.
Additionally, the investment earnings inside your super fund are taxed at a concessional rate of 15%, which can help boost your retirement savings over time. These tax savings can accumulate, potentially benefiting you when you eventually access your super in retirement.
Is Salary Sacrificing Right for You?
To set up a salary sacrifice arrangement, you need to confirm with your employer that they offer this option. If salary sacrifice is not available at your workplace, you may still be able to claim a tax deduction for after-tax contributions you make to your super.
When deciding how much to salary sacrifice, consider:
- How much extra you can afford to contribute without affecting your essential living expenses.
- Whether salary sacrificing on an ongoing basis or making lump-sum contributions is more suitable for your financial situation.
- You can’t salary sacrifice on income that has already been paid, such as bonuses or leave entitlements, so plan ahead if you want to sacrifice those amounts.
Set Up the Arrangement with Your Employer
Once you decide how much to contribute, inform your payroll department to set up the arrangement. Be sure to get confirmation in writing when your salary sacrifice contributions will start being paid into your super account.
Monitor Your Contributions
It’s essential to ensure you don’t exceed the concessional contributions cap, as doing so can trigger additional taxes and penalties. The cap applies across all super accounts you may have, so if you hold multiple accounts, keep track of total contributions to avoid breaching the limit.
You may also be eligible to carry forward any unused portion of the concessional contributions cap from previous years (since July 1, 2018) if your total super balance is under $500,000. You can check your available cap space on the myGov website.
Other Things to Keep in Mind
- Investment Risks: The value of your super can fluctuate depending on the performance of your investments. Before making extra contributions, make sure you understand the risks associated with your super fund’s investment options.
- Accessing Your Super: Generally, you can access your super when you reach your preservation age (between 55 and 60, depending on your birth year) and retire.
Other Ways to Boost Your Super
- Tax-Deductible Contributions. You can make voluntary contributions to your super using after-tax dollars and claim a tax deduction for them when you file your tax return. This can be useful if you earn extra income or sell an asset that triggers capital gains tax, as contributing the proceeds to super could reduce your taxable income and help offset the capital gains tax.
- Government Co-Contributions. If you’re a low or middle-income earner and make an after-tax contribution to your super, the government may match your contribution with a co-contribution of up to $500. For the 2024-25 financial year, if you earn under $60,400 and make a voluntary contribution, you’ll be eligible for the maximum co-contribution of $500.
- Spouse Contributions. If your partner earns less than you, you may consider making spouse contributions. You can claim an 18% tax offset on contributions of up to $3,000, which can help boost your partner’s super balance while reducing your taxable income.
- Downsizer Contributions. If you’re 55 or older and sell your home, you may be able to make a voluntary contribution of up to $300,000 (or $600,000 for couples) to your super from the sale proceeds, regardless of your work status, super balance, or contribution history.
Review Your Super Regularly
It’s important to review your super at least once a year to ensure it’s working effectively for your retirement goals. Key things to review include:
- Fund performance (past performance is not a guarantee of future returns).
- Any fees you’re paying.
- Insurance coverage inside your super and whether it meets your needs.
- Your investment choices, which should align with your risk tolerance and time horizon.
By staying on top of your super, you can make sure it’s growing in the right direction and set yourself up for a comfortable retirement.
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