When investing for the future, every dollar of tax saved boosts your retirement savings. More money stays in your retirement nest egg and less ends up in the ATO’s pocket. That’s where salary sacrifice into superannuation becomes a powerful strategy – it allows you to invest in a tax-effective way, generating a dual return: immediate tax savings today, and long-term wealth accumulation in a low-tax environment.
Let’s break it down.
How Does Salary Sacrifice to Super Work?
Salary sacrifice is where you direct part of your pre-tax salary into superannuation, instead of receiving it as take-home pay. This strategy reduces your taxable income and allows more of your money to grow inside the low-tax super environment.
Contributions are taxed at 15% inside super, rather than your personal marginal tax rate – which can be as high as 47% (including the Medicare Levy). The tax saving comes from the difference between these two rates.
Salary Sacrifice and Your Contribution Cap
Salary sacrifice is a type of concessional contribution, which counts towards your annual concessional contributions cap. For the 2025/26 financial year, the concessional cap is $30,000.
This cap includes:
- Employer contributions;
- Salary sacrifice contributions; and
- Personal deductible contributions
If you exceed the cap, you may be able to use unused concessional contribution caps from previous years (if your total super balance is below $500,000 as at 30 June of the prior year). Otherwise, excess contributions may attract additional tax.
Case Study: How Kriss Benefits from Salary Sacrifice
Kriss is an Office Manager earning $140,000 a year. She decides to salary sacrifice $1,000 per month ($12,000 per year) into super.
Here’s how her tax and net position changes:
| Net Income Position | Current | Proposed |
|---|---|---|
| Gross Income | $140,000 | $140,000 |
| Salary Sacrifice | $0 | -$12,000 |
| Tax | -$35,938 | -$31,748 |
| Net Income | $104,062 | $96,252 |
| Contribution Position | ||
| Employer Contributions | $16,800 | $16,800 |
| Salary Sacrifice | $0 | $12,000 |
| Contributions Tax | -$2,520 | -$4,320 |
| Net Contributions | $14,280 | $24,480 |
| Total Benefit | ||
| Net Income + Net Contribution | $118,342 | $120,732 |
| Total Tax Paid | -$38,458 | -$36,068 |
| Tax Saving | $2,390 |
In simple terms: Kriss gives up $12,000 in take-home income over the year, but comes out ahead by $2,390 overall (a 20% risk-free return!). Each month, she sacrifices $1,000 but her after-tax pay only drops by around $650 due to the tax savings.
Benefits of Salary Sacrifice to Super
There are several reasons why this strategy is worth considering:
- Reduced tax payable: Salary sacrifice reduces your assessable income which in turn, reduces the amount of personal income tax you will pay.
- Boosted retirement savings: By increasing super contributions, you will have more money invested within superannuation for your retirement.
- Tax-efficient savings structure: Superannuation can be a tax effective vehicle to save for retirement as earnings within your super fund are taxed at a maximum rate of 15%.
- Forced savings plan: Additional money is allocated to your retirement savings before you spend it. This creates a great forced savings plan and eventually you will adjust your expenditure to account for the reduced income.
- Employer incentives: In some instances, your employer may offer incentives to make voluntary contributions to superannuation. You need to check your employment contract to see if any incentives are available to you.
What Are the Risks of Salary Sacrifice?
This strategy has many upsides, but it’s important to be aware of the trade-offs:
- Reduced take-home pay: Reducing your pre-tax income will lower your take-home pay. This means having less money available for living expenses and alternative wealth building activities such as paying down debt.
- Contribution cap limits: You are limited as to how much you can salary sacrifice. As discussed, salary sacrifice forms part of your concessional contributions cap limit. If you exceed your cap limit, you may have access to carry-forward unused concessional contributions. If not, tax implications will apply. Please note, if you are currently in an untaxed fund, the standard concessional contribution cap limits may not apply to you, so you need to seek specific advice.
- Limited access to funds: Superannuation savings are preserved until you meet a condition of release. For most people, this condition is reaching preservation and retiring from the workforce. There are some instances where you may be able to access the benefits earlier such as release on compassionate grounds, financial hardship or under the First Home Buyer Super Saver Scheme.
- Understand your investment strategy and fee structure: Before putting any additional money into superannuation, you want to ensure you understand (and are comfortable with) the investment strategy and fee structure within your super fund.
- Division 293 tax: For high-income earners, if your combined income and concessional contributions exceed $250,000 in a financial year, you may face an additional 15% tax on some or all of your super contributions, totaling a 30% contributions tax.
- Legislative Changes: Funds held in superannuation are subject to ongoing legislative changes. This risk increases the further you are away from preservation age.
How to implement a salary sacrifice arrangement
Implementing a salary sacrifice arrangement is relatively easy. Simply discuss this with your payroll department and they’ll advise you on the process to get it set up. Contributions will be deducted automatically from your gross income each pay cycle.
The Guided Investor approach
If you’re earning a decent income and want to grow your retirement savings in a tax-efficient way, salary sacrifice can be a smart move. You get a tax break today and invest in your future at the same time.
We typically consider a salary sacrifice arrangement in Phases 2 and 3 of the Wealth Creation process. It’s a simple, low-maintenance strategy that can make a big difference – especially when paired with other smart planning strategies.
If you’re not sure whether it suits your situation, get in touch. Our Tailored Advice service can help you weigh up the pros and cons and make a plan that works for you.
