Putting some of your pre-tax dollars into super can do more than boost your retirement nest egg.
With more of us living longer, your super needs to last longer too. One way to help make sure your money won’t run out in old age is to start salary sacrificing into your super fund sooner rather than later.
Salary sacrificing isn’t only about the future, it could also help reduce the tax you pay today.
How salary sacrifice works
Salary sacrifice is simply a way to put more of your pre-tax dollars away for retirement rather than into your bank account to spend now.
Here’s how it works: you arrange with your employer how much of your pre-tax salary you want to add to your super and how often you want to make these contributions.
Generally, the amount you salary sacrifice into your super will be taxed at the concessional rate of 15%. This could be a considerable tax saving – especially if you’re in the higher tax brackets where you could be paying up to 49%¹ tax on your income.
However, very high income earners will pay an additional 15% tax – taking the total tax on these contributions to 30%. Previously this applied to people with an income over $300,000 pa, but as of 1 July 2017, the income threshold decreased to $250,000 pa.
Salary sacrifice in practice
Let’s have a look at how this arrangement might make a difference:
Jessica was earning $95,000 pa when her employer gave her a pay rise of $5,000. She wanted to invest this extra money for retirement, but she wasn’t sure how to go about it.
After talking to her adviser, Jessica decided to salary sacrifice the pay rise into her super. That way, she would save about $1,200 a year in tax² and save more for retirement compared to if she invested the money outside of super.
What income can I salary sacrifice?
You can only sacrifice income from future salary and entitlements. If you’re planning on salary sacrificing a bonus, you’ll need to arrange it before your employer has decided the amount that your bonus will be.
Ask your adviser
I can help you decide if salary sacrificing is the right strategy for your situation. And if it is, I can also help you work out the most tax effective amount to put away for retirement.
[1] Includes Medicare Levy and the Temporary Budget Repair levy of 2% on taxable income exceeding $180,000.
² Based on concessional contributions tax of 15% and personal tax rate of 39% including Medicare Levy.