One of the most heavily used strategies for putting away extra money for retirement is the process of salary sacrificing.
One of the most heavily used strategies for putting away extra money for retirement is the process of salary sacrificing.
What is salary sacrifice and how can it benefit you?
Salary sacrifice involves an employee agreeing to reduce part of their gross income (income before tax is taken out). In return, their employer makes a contribution to a superannuation fund on the employee’s behalf.
A correctly implemented salary sacrifice strategy is a way of increasing your super balance for the future, with the added benefit of tax savings, which means more money in your pocket for retirement.
The tax advantage for employees (you) is that salary sacrificed contributions are taxed at the rate of 15%* going into super, compared with cash salary, which is taxed at your marginal tax rate + the Medicare levy, which could be up to 47% next financial year.
What you may need to consider
Salary sacrificing into super may not suit everyone. You should consider possible impacts as a result of reducing your ‘salary’. Talk to your employer to find out if salary sacrificing will affect any other employment benefits you receive, such as compulsory Superannuation Guarantee contributions and leave loading. Most employers offer salary sacrificing without reducing these benefits.
Also, if your marginal tax rate is low, salary sacrificing may offer little or no advantage.
Is there anything else you should know?
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You will need to speak to your employer to make this arrangement.
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A salary sacrificing arrangement can only be made prospectively (based on future remuneration). To set up an arrangement for 2013/2014, speak to your employer now.
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The maximum concessional contribution is capped at $25,000 per annum (this may increase over the next few years). Concessional caps include Superannuation Guarantee (generally 9% of your gross income) and salary sacrifice contributions. Breaching your contribution cap can lead to extra tax being paid.
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Super is for retirement purposes and therefore you generally cannot get access to your salary sacrificed contributions until you retire after reaching age 55, transitioning to 60.
How salary sacrificing works
|
After tax |
Salary sacrifice |
|
|
Michelle earns |
$80,000 |
$80,000 |
|
Salary sacrifice contributions |
Nil |
($16,744) |
|
Salary after salary sacrifice |
$80,000 |
$63,256 |
|
Income tax and Medicare levy |
($18,747) |
($13,003) |
|
After-tax contributions paid into super |
$11,000 |
$0 |
|
Net salary |
$50,253 |
$50,523 |
|
Income tax reduction |
$0 |
$5,744 |
|
Extra gross super contributions |
$11,000 |
$16,744 |
|
15% contributions tax |
$0 |
($2,512) |
|
Increase in super balance |
$11,000 |
$14,232 |
|
Difference going into super |
– |
$3,232 |
By salary sacrificing $16,744, Michelle is still taking home the same amount. However, she is better off salary sacrificing compared to putting her $11,000 savings into super. She’s paying $5,744 less in income tax and she will be adding $3,232 more to her super each year.
*The Government has proposed doubling the contributions tax from 15% to 30% from 1 July 2012 for individuals earning more than $300,000 per annum. This proposal has not yet been legislated.
This example is illustrative only and not an estimate of the tax savings you will receive. To understand the rules around salary sacrifice and determine if salary sacrifice is right for you, contact Andy George on ageorge@sagefg.com or give him a call on 0402 882 360 for a free, no obligation and private chat about your finances.
This article was written by Andrew George. Andrew is an Authorised Representative from the Sage Financial Group. He has over five years experience in the financial services industry and can work one-on-one with you to help you become smarter with your finances. Any feedback directed to Andrew can be sent to ageorge@sagefg.com.
Disclaimer: The views and opinions of authors expressed do not necessarily state or reflect those of Mining People International.