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While the sacrificing bit might sound painful, salary sacrifice is all about giving up something now to get an even bigger financial benefit later on.
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 your super account, 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 will be subject to tax.
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 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, including 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 in 2023–24), so these types of arrangements can be a good way to reduce your tax bill.Â
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
Your super fund pays a maximum of 15% on investment earnings – in practice the real rate is close to 7% for most super funds thanks to franking credits and CGT discounts.
This can compare favourably with tax on investments outside super where investment earnings are taxed at your marginal income tax rate before the application of franking credits and CGT discounts.
| No salary sacrifice | With salary sacrifice | |
|---|---|---|
| Salary | $85,000 | $85,000 |
| Salary sacrifice | 0 | $6,000 |
| Taxable income | $85,000 | $79,000 |
| Income tax payable* | $19,792 | $17,722 |
| Take home pay | $65,208 | $61,278 |
| Net sacrifice to super (after 15% contribution tax) | $0 | $5,100 |
| Total take home pay and net voluntary super contribution | $65,208 | $66,378 |
| After-tax benefit | $0 | $1,170 |
* 2023–24 tax, offset and SG contribution rates.Â
4 things to consider before deciding to set up a salary-sacrifice arrangement for super
Salary sacrificing into your super account can be a great way to build your retirement savings and lower your tax bill, but it may not be the best strategy for everyone. Here are some things to consider before setting up an arrangement with your employer:
1. Your debt level
If you have large debts, salary sacrificing into super means you will have less after-tax income to pay your debts.
2. Ineffective for low-income earners
If your taxable income is under $21,885 in 2023–24, a salary-sacrifice arrangement won’t save you any tax, as there is no tax paid below this income level due to low tax rates and the low-income tax offset.
In 2023–24, the income tax rate on income between $21,885 and $45,000 is 19.0% – compared to 15% for a super contribution – so you receive a small tax benefit if you put a salary-sacrifice arrangement in place for some of your income.
For those on higher incomes, the tax benefit received from sacrificing some of your salary into your super account is more attractive. For example, if your annual income is between $45,001 and $120,000 in 2023–24, the tax rate on income between these two amounts is 32.5% – compared to 15% for a super contribution.
3. Impact on salary benefits
Salary sacrifice changes your salary level. It may mean benefits such as your holiday loading and overtime are lower, as your salary amount is lower. Check with your employer.
4. Concessional (before-tax) contributions cap
Salary-sacrificed amounts are counted towards your annual concessional (before-tax) contributions cap ($27,500 in 2023–24), so you need to take care not to exceed your cap (the maximum amount you can contribute concessionally). Remember that your employer’s super contributions are also concessional amounts and are counted towards the cap.
If your total super balance on 30 June is below $500,000 and you have unused concessional cap ‘space’ from prior years, you may contribute more than the standard annual cap using the carry forward of concessional contributions.
How to salary sacrifice into your super account
Step 1: Talk to your employer and find out if they offer these arrangements, as not every organisation does.
Step 2:Â Ensure the arrangement is in writing and clearly states all the terms of the salary-sacrifice agreement, such as the amount you want to contribute and when your employer will make the contributions into your super account. Some employers only make SG contributions every quarter, but if you are paid fortnightly or monthly, your salary-sacrifice contributions could go into your super account then. That way you start earning investment returns immediately.
Similar but different: Salary sacrifice and personal tax-deductible super contributions
As an employee, you have a choice between using a salary-sacrifice arrangement to top up your super or making a personal super contribution and claiming a tax deduction in your annual income tax return.
If your employer doesn’t offer salary sacrifice, or if you would simply prefer to manage contributions yourself, making a tax-deductible contribution is an alternative that will leave you in exactly the same tax position as the same amount of salary sacrifice would.
9 things to consider when comparing the two strategies:
- Not all employers offer salary-sacrifice arrangements.
- Once you set up a salary-sacrifice arrangement you don’t need to do anything else during the year.
- With salary sacrifice you receive the tax benefit immediately as part of your take-home pay, while with a personal contribution you have to wait until you lodge your annual tax return.
- If you work casually or have an irregular work pattern, salary sacrifice may be unsuitable as you can’t alter your contribution amount between pay periods.
- Reducing your taxable income with a salary-sacrifice arrangement may affect other benefits you receive, like overtime or holiday loading.
- Your employer may not process your salary-sacrifice contribution into super for up to three months, making it difficult to monitor your concessional (before-tax) contributions cap.
- An unexpected pay increase or bonus could mean your salary-sacrifice arrangement could take you over the concessional contributions cap.
- Personal contributions can be made as a lump sum at any time during the financial year, giving you flexibility if your income changes.
- With personal contributions, you can choose how much you want to contribute across the financial year and the amount you want to claim as a tax deduction.
