Let’s explore an often overlooked financial strategy in Australia: salary sacrificing to superannuation. This effective approach can enhance your retirement savings while providing tax advantages. Let’s examine the details in a straightforward manner.
What Is Salary Sacrificing to Super?
Salary sacrificing (or salary packaging) to super means arranging with your employer to contribute some of your pre-tax income directly into your superannuation fund. The beauty of this approach is that these contributions are typically taxed at just 15% when they enter your super fund, potentially much lower than your marginal tax rate.
Why It’s a Ripper Strategy
- Tax savings: For most workers earning over $45,000, your marginal tax rate is at least 32.5% (plus Medicare levy). By salary sacrificing, you’re essentially swapping this higher tax rate for the super contribution tax rate of just 15%.
- Compound growth: More money in super means more investment returns compounding over time. Even small extra contributions can grow to substantial amounts by retirement.
- Reduced taxable income: Lower taxable income may help you qualify for certain government benefits or avoid higher Medicare levy surcharges.
Smart Strategies for Salary Sacrificing
1. Know Your Contribution Caps
The concessional contributions cap is currently $27,500 per year. This includes your employer’s compulsory 11% Superannuation Guarantee contributions, so be careful not to exceed this limit or you may face additional tax.
2. Consider the “Fill the Gap” Approach
If you’re not already at the $27,500 cap, calculate the difference between your employer’s contributions and the cap. This “gap” represents your maximum efficient salary sacrifice amount.
For example, if your employer contributes $15,000 annually, you could potentially salary sacrifice up to $12,500 more without exceeding the cap.
3. Regular Small Contributions vs. Lump Sums
Setting up regular fortnightly or monthly salary sacrifice contributions often works better than large lump sums because:
- It creates a disciplined savings habit
- You benefit from dollar-cost averaging in your investments
- It’s less likely to impact your cash flow
4. Use Catch-Up Contributions If Eligible
If your super balance is under $500,000, you might be able to use “catch-up” or carry-forward contributions from previous years where you didn’t reach the cap.
Taking Action
Ready to boost your super and slash your tax bill? Here’s what to do:
- Calculate how much you can afford to salary sacrifice
- Check your current super contributions to determine how much room you have under the cap
- Speak with your payroll department about setting up the arrangement
- Consider consulting with a financial advisor for personalised advice
- Review your arrangement annually, especially after pay rises or tax changes
Remember, cobber, the best time to start salary sacrificing was when you got your first job. The second-best time is today!
Have you tried salary sacrificing to super? Share your experiences in the comments below.
Disclaimer: This information is general in nature and does not take into account your personal circumstances. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Written by Michael Andrew Bankier