Salary sacrifice and super: How does it work?

While the sacrificing bit might sound painful, salary sacrifice is simply about giving up something now to get an even bigger financial benefit later.

What is salary sacrificing?

Salary sacrificing goes by many names, including salary packaging and total remuneration packaging, but the meaning is the same.

Salary sacrifice is when an employee chooses to set up a special arrangement with their employer to forgo part of their salary or wage to help pay for a range of benefits like cars, school fees or extra super contributions.

If you decide to sacrifice some of your salary into super, you make an agreement with your employer for them to pay some of your pre-tax salary straight into your super fund, rather than into your bank account with the rest of your salary where it would be subject to tax at your marginal rate.

How do you benefit from salary sacrificing?

Setting up a salary-sacrifice arrangement for super contributions can be a great way to save extra for your retirement and potentially improve your overall financial position.

The main benefits are:

1. Reduced taxable income and a lower tax rate

Salary sacrifice is deducted from your pre-tax income, reducing the amount of income on which your income tax is calculated.

As salary-sacrifice contributions come from your pre-tax salary, most people only pay 15% tax on them when they enter the super system. If your income plus your concessional super contributions is higher than $250,000, you’ll pay an additional 15% – known as Division 293 tax.

This is a lower tax rate than most employees pay on their income (which can be as high as 47% with the Medicare levy), so these types of arrangements can be a good way to reduce your tax bill. 

If your income is low, salary sacrifice may not be beneficial because the 15% tax rate on super contributions may be higher than the tax you would otherwise pay.

2. Lower tax on investment earnings