Salary Sacrificing: A tax effective way to make super contributions
Making voluntary super contributions is a great way to build up your superannuation into retirement, and it could also reduce the amount of tax you pay.
Salary sacrifice is an arrangement between you and your employer with your employer paying some of your pre-tax salary into your superfund which will form part of your concessional contributions. If you earn more than $37,000 a year this is typically a tax effective strategy.
In any given year you can make a concessional contribution to your superfund to the cap of $25,000 p.a. It is important to consider the employer contributions being made to your superfund are 9.5% of your salary and you should confirm that you do not exceed the concessional contribution cap of $25,000.
How does salary sacrificing work
You will need arrange with your employer to direct a portion of your pre-tax salary to your superfund. The benefits of salary sacrificing some of your pre-tax salary into super include:
- You will pay less tax
- You will boost your retirement savings
- Investment earnings in super are concessionally taxed
Things to consider when salary sacrificing:
- Your money will be locked away until you reach preservation age and meet a condition of release
- There are limits on how much you can salary sacrifice into super
Salary Sacrificing: A Case Study
John earns $90,000 before tax, excluding his employer’s super contribution. If he decides to salary sacrifice $10,000 into his superfund, he will save $1,950 in total.
| John’s income | Without salary sacrifice | With salary sacrifice |
| Gross salary | $90,000 | $90,000 |
| Less salary sacrifice to super | $0 | $10,000 |
| Less tax + Medicare levy | $22,067 | $18,617 |
| Take home (net) pay | $67,933 | $61,383 |
| John’s super | ||
| Employer super contribution | $8,550 | $8,550 |
| Plus salary sacrifice | $0 | $10,000 |
| Less contributions tax | $1,282 | $2,782 |
| Net super contribution | $7,268 | $15,768 |
Assumptions: The figures used in this table are estimates only and are based on 2018-19 income tax rates, including the low and middle income tax offset, and a Medicare Levy of 2%. Employer super contributions remain the same after salary sacrifice. In this scenario, John’s take home pay will drop by $6,550.
Maximise your tax savings and combining it with a transition to retirement pension
If you have met your preservation age and are considering a Transition to Retirement Pension (TTR) you could maximise your tax savings and potentially maintain the same take home pay. It is important to note that you will need to meet a condition of release to access your superannuation, hence the importance of seeking financial advice.
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