Looking out for your financial future comes in many shapes and forms, including salary sacrificing into your super fund to prepare for your retirement in advance. Salary sacrificing is where you elect to have some of your GROSS wage (before tax) paid into your super account by your employer, rather than receiving your entire pay. This is in addition to what your employer already legally pays under the Superannuation Guarantee.
Although making salary sacrifice contributions involves reducing your immediate take-home pay, it also means your retirement savings will be increased, which may allow you to retire sooner and more securely. If you’re thinking about salary sacrificing to contribute to your future, below are some things to consider and keep in mind before you make your decision.
If you earn less than $250,000, the salary in your super account gets taxed at 15%, and if you earn more than $250,000 it’ll be taxed at 30%. In contrast, any salary you take home in your wage is taxed at your usual income tax rate, which can be as high as 47%. Therefore, the more salary that you put into your super, the smaller your taxable income will be – saving you some precious money at tax time. In this arrangement, you’re benefiting because you pay less tax while boosting your retirement savings.
If you own investments, the growth of your investments inside super is taxed at 15%, which may be less than the tax you inevitably pay on your investment earnings outside of super.
It’s a passive way of saving additional funds toward your retirement, as regular investments are made automatically via your usual payroll system, without you having to manually do anything.
You can use bonus payments received by your employer for a performance reward or increases in your salary as a less intense way to salary sacrifice that you won’t notice as heavily, ensuring you can live on your previous income whilst boosting your super at the same time.
If you earn less than $37,000 annually, only a small amount of tax will be saved and it’s important to weigh up whether it’s actually worth your while to have less money in your pocket for a tiny tax gain.
If you choose to salary sacrifice, your salary is inevitably changed, along with holiday loading and overtime if they are tied to your salary. It is still possible to reap the benefits while simultaneously salary sacrificing, but that’s a conversation and agreement you’ll need to reach with your employer.
The money you contribute into super isn’t accessible until you’ve reached retirement age, or in the case of a serious illness. Although super is one of the most ideal ways to invest in your retirement, make sure you’re not leaving yourself too short in all of the years prior.
You must stay within the set contribution limits when you start salary sacrificing into your superfund by making sure that your total concessional super contribution is not more than $25,000. If you do end up salary sacrificing more than the $25,000 cap, you may be required to pay a marginal tax rate based on the excess amount, as well as an additional excess concessional contributions charge. A majority of people tend to wait until it’s closer to the end of the financial year, so that they’re aware of how much they can truly afford to sacrifice and how close they are to reaching the contribution cap.