What is Salary Sacrifice?
It might sound a little dramatic, but at its core, salary sacrificing can be a tax effective way to boost your savings for retirement.
What is salary sacrifice into Superannuation? Salary sacrifice is an arrangement between you and your employer where you agree to forgo part of your before tax salary in return for your employer making super contributions of the same value.
Why would you want to do it?
So, why would I want to put away some of my salary now and not have access to it until I retire you might ask. The first reason is in the question itself, it can be used as a means to boost savings for retirement. Instead of making the default contributions, you can increase them to help your standard of living increase when you retire. We encourage all of our clients to take an active approach to planning for retirement, rather than a passive one.
Being certain about how much you’ll need to live how you want in retirement is not something to gloss over, although many still fail to give it the time and attention it deserves.
The second major reason to salary sacrifice, is that it may reduce your overall tax bill! Instead of that money being taxed at your marginal rate, which could be 45%, you’ll generally be taxed at a rate of 15% on the superannuation contribution. That’s a huge saving, especially if you can afford to forego the immediate income.
You might be a higher income earner and wanting to salary sacrifice a large chunk of your income, but there are caps to this. In the 19/20 financial year, you can make concessional contributions of up to $25,000.
Who can salary sacrifice?
Whether salary sacrifice is right for you will depend on your personal circumstances and income level. Generally speaking, if having a more comfortable retirement is your goal and your marginal income tax rate is 19% or higher, salary sacrifice may be a tax effective way to save for your retirement.
What are the rules?
A salary sacrifice arrangement is an agreement between you and your employer, since it is not compulsory for your employer to offer salary sacrifice.
The salary sacrifice agreement must be made before you earn the salary and relate to your future earnings.
Salary sacrifice contributions will be deducted from your salary before income tax is calculated and are generally taxed at a maximum rate of 15% (contributions tax) in the fund.
Salary sacrifice contributions are considered to be employer contributions.
What are the downsides?
Your employer may decrease your superannuation guarantee (SG) contributions because salary sacrifice contributions are considered to be employer contributions which count for SG purposes. This could reduce some of the benefits gained by salary sacrificing.
Once you put money into superannuation it is ‘preserved’. This means that it generally must remain there until you retire on or after preservation age or you reach age 65.
Your employer may place a limit on the amount of your salary that can be sacrificed to superannuation.
Salary sacrifice contributions count as a measure of income for many Government benefits and concessions.
The potential to exceed the concessional contributions cap, which may result in additional taxes.
Superannuation and tax laws do not govern when salary sacrifice contributions deducted from your salary must be paid to your superannuation fund. You will need to address this in your salary sacrifice agreement.
What now?
If salary sacrificing isn’t something you’ve thought about, but are interested in learning more about, get in touch with Addept Accountants + Advisors today to find out how it would benefit your financial situation!