There are a number of strategies that you can utilise to boost your superannuation balance and have a more comfortable retirement. It pays to play the long game with super, and the earlier you begin making additional contributions, the more you will benefit when it comes time to retire. However, there are also immediate benefits to salary sacrificing superannuation at any age.
The most common superannuation-boosting strategies usually involve voluntary contributions, and one type of pre-tax contribution is salary sacrifice. But what exactly is salary sacrificing into superannuation, and is it really worth it?
What is salary sacrifice?
Salary sacrifice is a reportable superannuation contribution and is essentially an arrangement whereby you take home less pay, in exchange for tax and superannuation benefits. This means you are making pre-tax contributions to your superannuation account, on top of your superannuation guarantee (SG) payments that your employer makes for you. The SG rate in Australia is currently 10.5%.
Can you claim salary sacrifice into superannuation as a tax deduction?
People elect to use a salary sacrifice agreement for a few different reasons. Some may estimate that their SG contributions alone will not give them the retirement lifestyle that they want. Others use salary sacrificing superannuation as a way to lower their tax bill, while also adding to their super balance. Usually, it will be up to you how much you actually contribute from your income each pay cycle.
How much can I salary sacrifice into superannuation?
To establish a salary sacrificing superannuation agreement, you’ll need to get in touch with your HR or payroll department, fill out the relevant paperwork and choose how much extra you want to contribute each pay cycle. It’s important to consider how much you can afford.
For example, you may make $80,000 each year before tax. You elect to contribute an additional $10,000 each year on top of your SG contributions. Subsequently, your income then becomes $70,000 each year, before tax.
When choosing how much to contribute, you also need to be aware of the annual cap on concessional (before-tax) contributions. Currently, the cap is $27,500 each financial year. However, if eligible, you may be able to carry over unused portions of this cap, across a rolling five-year period. You can read more about super contribution caps here.
It’s important to keep in mind that your employer doesn’t have to say yes to your request to set up a salary sacrificing superannuation agreement. They can make this decision based on their own discretion. If your employer does deny your request for salary sacrificing into superannuation, there are certainly other options available for adding to your superannuation balance.
First Home Super Saver Scheme
The First Home Super Saver Scheme aims to help people to buy or build their first home, by allowing you to access $50,000 by contributing $15,000 into your superannuation each year. That $15,000 must consist of voluntary contributions, including salary sacrificing into superannuation. Therefore, salary sacrificing into superannuation can be beneficial when trying to save for a home.
To be eligible for this scheme, you must:
– Be 18 or over
– Buying or building a house
– Plan to live in the house for at least 6 of the first 12 months of ownership.
What are the benefits of salary sacrificing superannuation?
Salary sacrificing into superannuation comes with several benefits for you and your superannuation balance.
– More money going into your superannuation account each financial year, equating to a larger balance when you retire, and a more comfortable retirement.
– Reduced income tax so long as you don’t exceed the concessional contribution caps.
– Returns on your investments inside super also get taxed concessionally
– The ability to participate in the First Home Super Saver Scheme.
These benefits are clear, but it’s important that you understand the process fully, before committing to a salary sacrificing superannuation agreement. Chatting with a financial adviser who specialises in superannuation is the best course of action.
What are the downsides of salary sacrifice?
There are a few things to think about before beginning your salary sacrificing superannuation agreement.
– You must be wary of exceeding the concessional contributions cap. If you do go over the cap of $27,500, excess contributions are included in your assessable income and will be taxed at your same marginal rate, subtracting a 15% offset. It’s important to remember that your SG contributions also count towards your concessional cap for the financial year, along with personal contributions.
– You may be required to pay Division 293 tax, if your income is over $250,000 for the financial year. This will place an additional tax of 15% on some of your contributions. Therefore, it’s essential that you consider your expected annual income when deciding whether or not to establish a salary sacrifice agreement.
– You’ll be receiving less money in your take home pay each week. It’s important to ensure that you do not overcommit yourself financially, to your salary sacrifice agreement.
I’m not on a high income, should I salary sacrifice?
There’s a common misconception that to benefit from salary sacrificing into superannuation, you need to be a high income earner. However, that’s not exactly the case. As long as you ensure you are not overcommitting and retain adequate take-home pay, salary sacrifice can be an excellent way to boost your super balance.
It can be a good idea to check out how your super balance compares to others your age by checking out the average super balances by age to see whether you need to do some catching up.
Want excellent superannuation advice on salary sacrificing, and more?
Before committing to a salary sacrificing superannuation agreement, we strongly recommend that you have a chat with superannuation experts. At Review My Super, we provide sound advice to people who want to make the most of their superannuation and prepare for a comfortable future. To speak to a financial advisor, simply get in touch with us today.