Salary sacrifice, sometimes referred to as salary packaging, is a financial arrangement an employee can make with their employer to sacrifice a portion of their salary or wages in exchange for various benefits, in this case, additional super contributions.
This article aims to unravel the complexities of salary sacrifice, exploring how it works and its potential advantages as a financial strategy.Ā
Understanding Salary Sacrifice
The concept of salary sacrifice revolves around redirecting a part of your pre-tax income into your superannuation, over and above what your employer contributesāsuperannuation guarantee (SG).
As shown in the table below, if you earn $120,000 annually and opt for a salary sacrifice of $12,000 into your super, your taxable income decreases to $108,000. This reduction in taxable income means you could pay less tax while saving more for retirement.Ā
In this example, Sally will boost her superannuation by $10,200 per year whilst reducing her take-home pay by $7,500. This means she will save $2,700 in tax each year.
The Benefits of Salary Sacrifice
This strategy is generally recommended to people who have capacity in their monthly cash flow and is one of the most tax-effective ways to save for retirement.
- Pay less tax by reducing your taxable income.
- Accumulate future wealth more efficiently with a concessional tax rate of 15% on salary sacrifice contributions.
- Boost retirement savings so you can retire earlier or with more savings.
Salary Sacrifice: Things to Consider
While salary sacrifice can help you pay less tax and save faster for retirement, several factors must be considered before implementing this strategy.Ā
- Debt levels
If you have substantial debts, salary sacrifice could make it harder for you to meet your repayment obligations.
- Income level
Generally, if you earn less than $45,000 per annum, salary sacrifice may not be the most efficient way to structure your money.
- Impact on salary
Salary sacrifice can potentially affect entitlements such as overtime pay or holiday bonuses and your employer may adjust these benefits in line with revised salary levels.
- Concessional contribution caps
There’s a limit to how much extra you can contribute. The combined total of your employer and salary sacrificed contributions must not be more than $27,500 per financial year.
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If Salary Sacrifice Salary is right for your circumstances, the Money Check-Up will recommend it, and show you how to progress with the strategy.
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