Is it worth salary sacrificing into my super?

Key takeaways

  • Salary sacrificing means you agree with your employer to direct part of your before-tax salary straight into your super account.

  • These contributions are on top of compulsory contributions made by your employer.

  • Salary sacrificing can be a tax-friendly way to boost your super today.

Are you worried about having enough money in retirement? It’s never too late to start growing your retirement income, no matter what your situation.

Salary sacrificing into super is about sacrificing some of your income now, to save for your retirement later. It also means you’re not just relying on your employer’s regular Superannuation Guarantee contribution to save for your future.

In this article we look at how it works, the potential benefits and some things to consider when deciding if it’s right for you.
 

What is salary sacrificing into super?

There are a number of ways that you can make voluntary contributions to super. Salary sacrificing is an agreement between you and your employer to pay some of your pre-tax salary as contributions into super. Doing this can also be tax effective. The amount you contribute to super is taxed at up to 15% (and up to 30% if your income from certain sources is over $250,000 per annum) rather than your marginal tax rate, which might be up to 47%.

There is a limit on the amount you can contribute into super every year. These are referred to as contribution caps. Salary sacrificed amounts to super are considered concessional contributions, along with your employer’s contributions and any personal contributions you want to claim a tax deduction for. In the 2021/22 and 2022/23 financial years, the annual concessional contributions cap is $27,500. Contributions above your concessional contributions cap are taxed at your marginal tax rate, rather than the concessional rate explained above.

Note: If you meet certain eligibility conditions, you may be able to access unused concessional contributions from an earlier financial year, under what’s referred to as the ‘catch up concessional contribution‘ rule. These rules are complex. For more information see ato.gov.au.
 

What are the benefits?

Once you’ve put a salary sacrifice arrangement in place, your additional employer contributions should happen automatically. As these contributions are taken from your pre-tax salary, they reduce your taxable income for the year. Also, because the tax applied to concessional contributions is generally less than your marginal tax rate, this means more of your hard-earned cash is being put towards your retirement savings. Even though these regular contributions might seem to be quite small, the power of compounding returns may mean that your money grows quicker over time as your potential returns may help your total investment to grow, also increasing the potential for greater returns in the future.

You’re also saving additional money towards your retirement without having to do anything. The regular investments happen automatically via your employer’s payroll system.

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Is salary sacrifice right for me?

It could be, but first check that you’re eligible to contribute to super and remember that:

  • Salary sacrifice will reduce your home pay so consider whether it will fit with your personal circumstances and financial commitments. Depending on your level of income, it can be a very tax-effective way to contribute more to your super. Try using the MoneySmart Super contributions optimiser to see how salary sacrifice can work for you.

  • You can always vary your salary sacrifice agreement if your circumstances change, and the amount that you’re able to contribute to super increases or decreases.

  • Salary sacrifice contributions count towards the concessional contributions cap and tax penalties may apply if the cap is exceeded.

  • You can’t access your super until you meet a condition of release such as reaching your preservation age and retiring.

     

You also need to start by talking to your employer about your options to set up a salary sacrifice arrangement and how much you’d like to deduct from your pay. You can only salary sacrifice future salary and entitlements that you haven’t yet accrued an entitlement to. It is also important to understand if it will impact any other employment entitlements such as termination payments, bonuses and other benefits.

Boost your super today

Your employer may already be contributing to your super account. But you might be thinking of adding a little more, because even small additional amounts, into your super today, can make a big difference down the track. And by contributing more, you may even end up paying less income tax.

With a variety of ways to grow your super it’s also worth exploring the different options available to see which best suit your budget today – to help you achieve your goals for tomorrow.

Our on-demand webinar, Growing your super, can help you understand the various contribution strategies and their potential benefits. Each contribution type has different features and benefits, and how they may fit with your personal circumstances and financial commitments also differs.

Want to talk super?

MLC super supports you through every stage of your working life. Get set in the right direction with help and guidance available over the phone, online or face-to-face. Call us today on 02 9554 3566.

Important information and disclaimer

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at May 2022 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.

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