Salary sacrificing into super – how it works
18 Apr 2019
Salary sacrificing into super involves reducing your take-home pay to put more money away for your retirement. See what you need to know.
Salary sacrificing into super is where you choose to have some of your before-tax income paid into your super account by your employer.
This is on top of what your employer might pay you under the Superannuation Guarantee, which will be no less than 9.5% of your earnings, if you’re eligible.
Making salary sacrifice contributions does involve a reduction in your take-home pay, but it also means you could increase your retirement savings while also potentially reducing what you pay in tax.
If you’re thinking about setting up a salary sacrifice arrangement, here are some things to consider.
How much can I contribute?
You decide how much you want to contribute and whether it’s a one-off payment, or something you can afford to do regularly.
Are there limits to what I can contribute?
Yes. You can’t contribute more than $25,000 per year under the concessional super contributions cap or penalties will apply.
It’s also important to note that contributions made into your super as part of a salary sacrifice arrangement are not the only contributions that count toward this cap.
Other contributions that count toward your concessional contributions cap include:
- Compulsory contributions your employer pays under the Superannuation Guarantee
- Contributions from any other jobs you may have held in the same financial year
- Contributions you make using after-tax dollars which you choose to claim as a tax deduction
- Notional taxed contributions if you’re a member of a defined benefit fund.
What are the potential tax benefits?
If you choose to reduce your pre-tax income by salary sacrificing into super, a potential benefit is you may be able to reduce your taxable income for the financial year, which could see you pay less in tax.
That’s because contributions made via a salary sacrifice arrangement are taxed at 15% if you earn under $250,000 a year, or 30% if you earn $250,000 or more a year, which is often lower than what most people pay on their employment income.
In addition, there could be further tax benefits as investment earnings made inside the super environment also benefit from an equivalent tax saving, which could make a big difference when you do eventually withdraw your super savings and retire.
How do I set up a salary sacrifice arrangement?
If salary sacrificing into super is right for you, here are some things to add to your checklist.
Make sure your employer offers salary sacrifice
You will need to confirm with your payroll team at work that your employer offers this type of arrangement. If not, you may be able to achieve broadly the same benefits by claiming a tax deduction on contributions you may choose to make using after-tax dollars instead.
Decide how much you want to salary sacrifice, how often and when
You might want to salary sacrifice on an ongoing basis, or as a one-off. Also, you can’t salary sacrifice income that you’ve already received, such as a bonus or leave entitlements, so you’ll need to act well before this money is paid into your regular bank account if you want to salary sacrifice it.
Notify your employer and get any agreement in writing
If you can salary sacrifice (and you know how much, how often and when you want to do it), contact your payroll team at work to find out what information they need. Ask them to confirm in writing when your contributions will start being paid, so you can check that the contributions are being received into your super account.
Make sure you don’t exceed the $25,000 annual concessional contributions cap
If you do exceed the cap, additional tax and penalties may apply. If you’re an AMP super customer, you can set up notifications in My AMP to let you know when you’re nearing your limit. Remember, the cap applies to all concessional contributions, whether they’re made into one or more super accounts.
It’s also worth noting that from 1 July 2019, your concessional contributions cap may be higher than $25,000 if you’re eligible to use unused concessional contribution cap amounts that you’ve carried forward from previous years.
Are there any other things I should be aware of?
- The value of your investment in super can go up and down. Before making extra contributions, make sure you understand and are comfortable with any potential risks.
- The government sets rules about when you can access your super. Generally, you can access it when you’ve reached your preservation age (which will be between the ages of 55 and 60 depending on when you were born) and you retire.
Where can I go for more information?
Everyone’s different, so if you’re thinking about setting up a salary sacrifice arrangement, consider your circumstances and whether it’s the right thing for you.
Speak to your BFS Adviser and if you don’t have one but are after some advice, please contact us to speak to one of our team.
For further insights, read about other ways you can contribute to your super.