Is it the odd name that leads people to think that it is all a bit too hard? Or is it maybe a perception that you need to be a high income earner to take advantage of it? Whatever the reason, the truth is that salary sacrificing is actually quite a simple, accessible and effective way for many working Australians to save on tax while boosting their super nest egg.
- Can extreme budgeting work for you?
- How much retirement income do you need?
- Are there alternatives to income protection?
While employed people are generally not able to make tax deductible voluntary contributions to their super in the same way as the self-employed, they can still achieve tax benefits through their superannuation using a salary sacrificing strategy. All it takes is a little initiative to make an arrangement with your employer to alter your salary package so that some of your pre-tax income is diverted into your super rather than being taken as taxable income in the hand. This creates both a genuine savings on income tax and a welcome shot in the arm to your super.
It’s a particularly useful strategy for those who are entering the latter stages of their working lives when dependents have perhaps flown the coup and there is more discretionary income to be able to stack their super.
It’s simpler than you think
The basic premise of salary sacrificing is to channel some of your pre-tax income toward your super, rather than taking it as income. Money flowing to your super is taxed at a maximum rate of 15 per cent, compared to tax on your income which (depending on your income) can be as high as 49 per cent. While there is a drop in take home pay, this is more than compensated by an overall reduction in the total tax you pay and a significant boost to your retirement savings. Here’s an example to illustrate how it can work:
*Calculations for income tax and Super Guarantee Contribution are based on 2016/17 tax year and include Medicare levy
In this example take home pay is reduced, but when it is combined with the amount going toward building your super the net overall improvement in your position is $780, after all taxes are taken into consideration. But, don’t forget, once your money goes into super, it generally needs to stay there until your reach your preservation age and retire from employment.
Take the initiative
While your employer is no better or worse off as a result of you salary sacrificing into your super, it is not something that they will usually actively promote or suggest to you and you should seek advice from a financial planner before making the decision to salary sacrifice.
Once you decide a salary sacrifice strategy is right for your financial situation, the steps to initiate it are quite straightforward. Firstly, you simply approach your payroll officer to make sure they are happy to enter the arrangement. You then simply decide how much you would like to salary sacrifice and complete a salary sacrifice agreement, which is submitted to your payroll officer to authorise them to divert your requested amount to the super fund you choose. The pro forma agreement will usually be available through the fund into which you want to have the contributions paid.
Part of your overall strategy
Salary sacrificing is one way of accelerating your super tax effectively, but it should always be done as part of an overall retirement savings strategy. It is best to seek advice from a qualified financial planner to make sure that salary sacrificing is appropriate for you and to determine how much you should be allocating toward your super through such an arrangement.
Have you experienced the benefits of salary sacrificing? Let us know your story below.