Salary Sacrifice is a term used to describe the practice of an employee directing a portion of their pre-tax income into superannuation, rather than having it paid to them personally. The benefit of this is that you can save tax. The less tax you pay, the more you have left over to invest.
Concessional contribution
Salary sacrifice is a type of concessional contribution, and forms part of your concessional contributions cap limit. In the current 2024/25 financial year, the concessional contributions cap limit is $30,000. Please remember that other contributions, such as employer contributions and personal deductible contributions, also form part of this cap limit.
When wages are salary sacrificed to superannuation, the money gets taxed at the superannuation rate of 15% rather than your marginal tax rate. The tax saving you get is the difference between the your marginal tax rate (which can be as high as 47% when the Medicare levy is included) and the 15% contributions tax. To give you an idea of how this may work, let’s look at an example.
Example of salary sacrifice
Kriss works as an Office Manager, earning $140,000 per annum. Kriss decides to salary sacrifice $1,000 per month ($12,000 per annum) into her super, on top of her 11.5% employer contribution. By doing so, her taxable income is reduced by $12,000 but she incurs an additional 15% contributions tax on the $12,000 contributed to super. Given this, Kriss’ estimated personal tax payable reduces by $4,190 but tax paid by her superannuation fund increases by $1,800. This gives Kriss a net tax saving of $2,390.
| 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 | $16,100 | $16,100 |
| Salary Sacrifice | $0 | $12,000 |
| Contributions Tax | -$2,415 | -$4,215 |
| Net Contributions | $13,685 | $23,885 |
| Total Benefit | ||
| Net Income + Net Contribution | $117,747 | $120,137 |
| Total Tax Paid | -$38,353 | -$35,963 |
| Tax Saving | $2,390 |
Please note, the above calculation is applicable to the 2024/25 financial year.
You receive the tax benefit each pay cycle as the amount of tax your employer pays on your behalf under the PAYG system, is reduced. In Kriss’ case, even though she was salary sacrificing $1,000 a month, her after-tax income would only reduce by an estimated $650 per month thanks to this tax saving.
Benefits of salary sacrifice
There are many potential benefits of salary sacrifice, include the following:
- 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.
Risks of salary sacrifice
Before implementing a salary sacrifice arrangement, it’s important to consider the potential risks. Below are some of the key risks to consider when salary sacrificing to superannuation:
- 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 advise you on the process to get it set up.
Guided Investor’s take
In the right circumstances, salary sacrifice to superannuation can be a great strategy to implement in order to help you boost your retirement savings. It is effectively like getting a tax deduction for investing for yourself! If you want our help to assess if salary sacrifice is an appropriate strategy for you, check out our Tailored Advice offering.
