Salary sacrifice - a clever way to boost your super
The tax effective super-boosting power of salary sacrificing is readily available to employed people, so why don’t more of them take advantage of it?
Is it the odd name that leads people to think that it is all a bit too hard? Or is it maybe a perception that you need to be a high income earner to take advantage of it? Whatever the reason, the truth is that salary sacrificing is actually quite a simple, accessible and effective way for many working Australians to save on tax while boosting their super nest egg.
All it takes is a little initiative to make an arrangement with your employer to alter your salary package so that some of your pre-tax income is diverted into your super rather than being taken as taxable income in the hand.
It’s a particularly useful strategy for those who are entering the latter stages of their working lives when dependents have perhaps flown the coup and there is more discretionary income to be able to stack their super.
It’s simpler than you think.
The basic premise of salary sacrificing is to channel some of your pre-tax income toward your super, rather than taking it as income. Money flowing to your super is taxed at a maximum rate of 15 per cent, compared to tax on your income which (depending on your income) can be as high as 49 per cent. While there is a drop in take home pay, this is more than compensated by an overall reduction in the total tax you pay and a significant boost to your retirement savings. Here’s an example to illustrate how it can work:
No salary sacrifice
With salary sacrifice
|Super Guarantee contribution||$7,600||$7,600|
|Income tax payable||$16,525||$15,145|
|Take home pay||$55,875||$53,255|
|Total super contribution||$7,600||$11,600|
|Super contribution tax||$1,140||$1,740|
|Net super contribution||$6,460||$9,860|
|Total net salary and net super contribution||$62,335||$63,115|
Net improvement in overall position
Calculations for income tax and Super Guarantee Contribution are based on 2016/17 tax year and include Medicare levy.
In this example take home pay is reduced, but when it is combined with the amount going toward building your super the net overall improvement in your position is $780, after all taxes are taken into consideration. Don’t forget, once your money goes into super, it generally needs to stay there until you reach your preservation age and retire from employment.
But, when you do retire from employment you’ll reap the rewards of your ‘sacrifice’ as illustrated in the example below of a 40 year old who puts an extra 6% of her salary into super each each until she retire at age 70, saving an additional $153,569!
Are you on track to live the lifestyle you want in retirement?
Projected benefits of putting extra savings into super:
- Age 40
- Starting ballance $100,000
- Income of $100,000 per year
Income is indexed (AWOTE: 3.2%)
Super invested in Balanced fund; Income 4.87%, Growth 2.18% (100% taxable) and Franking of 16.18%.
Source: Superannuation calculator - MoneySmart website www.moneysmart.gov.au
Take the initiative
While your employer is no better or worse off as a result of you salary sacrificing into your super, it is not something that they will usually actively promote or suggest to you and you should seek advice from a financial planner before making the decision to salary sacrifice.
Part of your overall strategy
Salary sacrificing is one way of accelerating your super tax effectively, but it should always be done as part of an overall retirement savings strategy. It is best to seek advice from a qualified financial planner to make sure that salary sacrificing is appropriate for you and to determine how much you should be allocating toward your super through such an arrangement.