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Salary sacrificing your super

Older man with a white beard placing a single coin gently into a golden piggy bank.

Considering boosting your super? You're not alone. Salary sacrificing into your super is a smart move many Aussies are making to secure a better retirement. It's not just about stashing away more cash for the future; it's also about smart tax moves today.

In this guide, we'll walk through what salary sacrifice is all about. From the how-tos to the pros and cons, and even the nitty-gritty tax stuff, we've got you covered. Wondering how much you can put away or if it's really worth it? We'll dive into that too.

Ready to see if salary sacrificing can work for you? Let's start with the basics.

What is salary sacrifice?

Salary sacrifice is when you and your employer agree to funnel a part of your pre-tax salary straight into your super fund instead of it landing in your paycheck. It's a smart way to grow your retirement savings without feeling the pinch right now.

Here's how it works: you decide on an amount from your salary that goes directly into your super. Your employer handles this part, making the contributions for you. The great thing about this is it's all done with your pre-tax income, making it a tax-savvy move for your future nest egg.

How does salary sacrifice work?

Salary sacrifice is all about reshaping the way your income is used, especially when it comes to taxes and saving for retirement. Let's peel back the layers to see exactly how it works:

  • Forming an agreement. First things first, you and your employer need to agree on how much of your pre-tax salary you're going to steer into your super. This usually involves a bit of paperwork to make sure everyone's on the same page.
  • Salary redirection. Once you've got the green light, the portion of your salary you chose gets rerouted. Instead of landing in your bank account, it heads straight to your super fund.
  • Effect on take-home pay. Going for salary sacrifice does mean your regular paycheck shrinks a bit by the amount you're setting aside. But here's the upside: doing this before tax cuts down your taxable income, which might even nudge you into a lower tax bracket.
  • Tax treatment. The portion of your salary you've sacrificed isn't forgotten in the tax department – it gets taxed, but at a concessional rate within your super fund. More often than not, this rate is friendlier than your usual income tax rate.
  • Adhering to contribution limits. There's a cap on how much you can contribute to your super this way without bumping into extra taxes. At the moment, the cap on concessional contributions, which include your employer super guarantee, salary sacrifice and deductions on other post-tax contributions is $27,500. We’ll go into this more later.

Getting to grips with these aspects of salary sacrifice can really highlight its value in retirement planning. It's a strategic way to enhance your super savings and can bring some handy tax benefits along for the ride. Understanding these details is crucial for informed decisions about your super contributions and overall financial strategy.

Salary sacrifice benefits

Salary sacrificing into your super can be a game-changer for your financial future, offering a bunch of benefits that make it a go-to strategy for many. Here's a rundown of what it brings to the table:

  • Tax efficiency. Here's the big draw: salary sacrificing can lead to real tax savings. By redirecting part of your pre-tax salary to your super, your taxable income gets reduced. Plus, the contributions to your super are taxed at a concessional rate – usually lower than your usual tax rate.
  • Boosted retirement savings. It's all about setting yourself up for a comfier retirement. By shifting more money into your super, you're giving your retirement fund a serious boost. Over the years, these extra contributions, along with the magic of compound interest, can significantly increase your super balance.
  • Flexibility and control. The beauty of salary sacrifice is that it's not set in stone. You can tweak the amount you contribute based on how your financial situation or goals change over time. This flexibility lets you tailor your savings strategy as your career progresses.
  • Simplicity and convenience. Once you've got salary sacrifice set up, it's smooth sailing. Your employer takes care of the contributions, making it a hassle-free way to grow your retirement funds.
  • Potential for higher retirement income. More money in your super now means the potential for a higher income when you retire. It's about laying the groundwork for a financially secure and comfortable retirement.
  • Immediate financial impact. Unlike some other long-term strategies, salary sacrifice can offer tax benefits right off the bat. It's a smart move for immediate financial benefits while also setting you up for the future.

In a nutshell, salary sacrifice is a mix of tax perks, beefed-up retirement savings and ease of use, making it an appealing choice for anyone looking to give their long-term financial health a boost.

Disadvantages of salary sacrifice

Salary sacrificing into your super is not without its downsides. It's worth considering these potential drawbacks to see if this strategy really fits with your financial game plan.

  • Reduced take-home pay. First up, the most noticeable effect of salary sacrificing is that your paycheck shrinks. This could squeeze your monthly budget, especially if you're already juggling hefty expenses or debts.
  • Impact on loan eligibility. With a lower declared income, getting a loan or a mortgage might become trickier. Lenders often look at your take-home pay to figure out how much you can borrow.
  • Limits on accessibility. The money you put into your super through salary sacrifice isn't something you can dip into whenever you like. It's locked away until you hit retirement or another condition of release. This means you've got less cash at hand for any immediate or unexpected needs.
  • Contribution caps. There's a ceiling on how much you can contribute to your super at those lower tax rates. Go over these limits, and you could be hit with extra taxes, which might take the shine off the benefits of salary sacrificing.
  • Dependence on employer participation. Not every employer offers salary sacrifice options, and the ones that do might have different terms. This means not everyone has the same shot at the perks of salary sacrificing.

Balancing these downsides with the benefits is key, especially when you factor in your own financial needs, retirement goals and immediate cash flow. Getting some advice from a financial advisor could also be a smart move, helping to tailor salary sacrificing to fit your overall financial strategy.

Salary sacrifice tax benefits and implications

Getting a handle on the tax side of salary sacrificing is a big part of using this strategy effectively. It's a smart way to pump up your super savings, but it comes with a few tax-related points you need to consider:

  • Lower taxable income. When you salary sacrifice, a portion of your pre-tax salary goes straight into your super, bypassing your bank account. This move lowers your taxable income, which could, in turn, reduce the amount of tax you have to pay.
  • Concessional tax rate on contributions. The money you put into your super through salary sacrifice isn't tax-free, but it's taxed at a concessional rate within your super fund. This rate is generally lower than what you'd pay on your regular income, making it a more tax-efficient way to save.
  • Impact on tax return. The amount you're sacrificing won't show up as taxable income on your tax return. This can play a part in determining how much tax you owe or even the size of your tax refund.
  • Reportable employer super contributions. Even though salary sacrifice contributions reduce your taxable income, they're still counted as reportable employer super contributions on your tax return. This detail can affect things like government benefits or obligations.
  • Contribution caps and tax implications. There's a limit to how much you can contribute to your super at these concessional rates each year. If you go over this cap, you could be up for extra taxes, which might take away from the tax benefits of salary sacrificing.

By keeping these factors in mind, you can weave salary sacrificing into your financial plan in a way that maximises the benefits while staying on top of the tax game.

Salary sacrifice super limits

Knowing your limits when it comes to salary sacrificing into your super is a key part of smart financial planning. There are set caps on how much you can put in at those lower tax rates, and these caps cover all kinds of contributions, including your salary sacrifice ones.

For the financial year 2022-2023, you're looking at a ceiling of $27,500 for concessional contributions. This cap includes everything that goes into your super at the concessional rate - like your employer's contributions, what you salary sacrifice and any personal contributions you claim as a tax deduction.

If you find you haven't hit that cap in a particular year, you might be able to roll over the unused portion for up to five years, but only if your total super balance is sitting below $500,000.

So, keeping a close eye on all your super contributions is crucial, especially if you're into salary sacrificing or if your employer is putting in a fair chunk. Staying on top of your total contributions and how they stack up against the current cap is vital for savvy decision-making about your salary sacrifice contributions year on year.

Salary sacrifice vs. voluntary contributions

It’s not so much that there’s a difference between salary sacrifice and voluntary contributions, it’s that salary sacrifice is just one type of voluntary contribution.

Voluntary contributions are basically any contribution other than the ‘involuntary’ super guarantee that your employer is required to deposit for you.

Another type of voluntary contribution is an after-tax contribution you contribute to your super after you’ve already paid income tax on it. No employer involvement at all.  

The big difference is between concessional and non-concessional contributions, and the way each are taxed. Your salary sacrifice can fall into either category depending on how much you’re contributing to your super overall. For more information on how super is taxes at the contribution, accumulation and withdrawal stages, check out our guide on superannuation tax.

The table below will also give you a high-level overview.

Voluntary Contributions
Involuntary Contributions
Contributions made by choice, not mandated by law.
Contributions required by law, like employer contributions under the Superannuation Guarantee.
Includes both concessional (pre-tax, like salary sacrifice and tax-deductible post-tax contributions) and non-concessional (after-tax without a tax deduction).
Primarily employer contributions, which are a percentage of your ordinary earnings.
Tax Treatment
Concessional: Taxed at 15%. Non-Concessional: Taxed at your marginal tax rate.
Taxed at 15%. Contributions over the $27,500 cap are taxed at the individual's marginal tax rate.
Concessional: Capped at $27,500 per year. Non-Concessional: Higher cap, varies based on super balance and contributions history.
Governed by the Superannuation Guarantee percentage of your salary. Excess contributions above the $27,500 cap are subject to additional taxes.
High flexibility, you can choose the amount and timing of contributions.
Fixed, determined by legislation and employment arrangements.
Maximising super savings, tax planning, retirement planning.
Ensuring a minimum level of super savings, mandated by law for retirement security.
Dependency on Income
Can be made regardless of income level, though benefits vary by tax bracket.
Linked to employment income; the more you earn, the higher the contribution.

Getting a handle on the differences between voluntary and involuntary, concessional and non-concessional contributions is important for smart retirement planning and managing your finances effectively. 

How to salary sacrifice your super

Setting up a salary sacrifice for your super isn't just about stashing away extra cash for the golden years – it's a smart strategy that needs a bit of planning. Here's the lowdown on how to get it rolling:

  1. Check your financial landscape. Before diving in, take a good look at where you stand financially. Think about your current budget, what the taxman takes, and what you're aiming for in retirement. You want to make sure that tucking away part of your salary now won't leave you stretched thin.
  2. Have a chat with your employer. Not all workplaces offer salary sacrifice, so your first move is to see if it's even on the table. If it is, get the nitty-gritty on what that means for you and your super.
  3. Figure out how much to chip in. This part's a balancing act. Decide how much of your pre-tax earnings you're cool with redirecting to your super. It's all about snagging those tax benefits without leaving your wallet too light. And yep, remember there's a cap on how much you can contribute each year.
  4. Get it in writing. Once your boss gives the thumbs up, nail down the details in writing. This agreement should lay out how much you're contributing and when it kicks off.
  5. Keep an eye on the caps. The super world has rules about how much you can contribute each year without getting dinged with extra taxes. So, keep tabs on what you and your employer are putting in.
  6. Regularly review your setup. Life changes, and so do tax laws. Make it a habit to periodically revisit your salary sacrifice arrangement to make sure it's still doing what you want it to do.
  7. Understand the payroll mechanics. Clear up with your employer how they'll handle the salary sacrifice bit in your paychecks. You want to make sure those contributions are hitting your super account right.
  8. Check your super statements. Every now and then, take a peek at your super statements. It's a good way to confirm that your salary sacrifice contributions are on track.
  9. Get some expert advice. If you're looking to really fine-tune things, especially around taxes and maximising your retirement stash, having a chat with a financial advisor can be a big help.

By ticking off these steps, you're not just boosting your super – you're weaving salary sacrifice into your big financial picture in a way that really works for you.

Who can salary sacrifice their super?

Eligibility for salary sacrificing into your super is fairly broad, but there are a few key points to keep in mind. Firstly, your employer needs to offer this option. It's common in larger companies, and in sectors like government and non-profits, but less so in smaller businesses or for casual employees.

Age-wise, there's generally no barrier for salary sacrificing, although those over 67 need to meet specific criteria related to employment status to make voluntary contributions to their super.

The decision to salary sacrifice often depends on your income level. It tends to be more beneficial for higher earners due to the tax advantages. For those on a lower income, the tax benefits may not be as substantial.

For those not Australian residents for tax purposes, it's important to check how salary sacrificing might affect your tax situation. This can get complex, so seeking professional advice is a good idea.

Lastly, some super funds have their own rules about salary sacrifice contributions, so a quick check with your fund can clear up any uncertainties.

In essence, while many employees can opt for salary sacrifice, understanding your specific circumstances and how they align with your employer's policies, your super fund's rules, and the tax implications is key to making an informed decision.

Salary packaging vs salary sacrifice

When you're looking at ways to manage your income and super, you'll come across the terms salary sacrifice and salary packaging.

Salary sacrifice is about diverting some of your pre-tax salary directly into your super fund. It’s a practical move for tax savings, as these contributions are taxed at a lower rate, helping you reduce your taxable income while boosting your super.

Salary packaging is a broader term. It involves receiving part of your salary in the form of various benefits, like a company car or health insurance. It's about the diverse ways your total compensation can be structured, and salary sacrificing into your super can be a component of this.

Bottom line

Delving into the benefits of salary sacrificing can be a game changer in your financial strategy, particularly for future planning. To further your understanding, our superannuation guides hub offers insights into a wide range of superannuation topics, providing supportive resources to aid your financial planning journey.

Keep in mind, though, that while our guides are great for building your knowledge, they don't replace tailored financial advice. Since everyone's financial situation is unique, consulting with a qualified professional financial advisor or appropriate authorities is a key step. They can offer guidance and advice that's specifically designed for your individual circumstances.

FAQs for salary sacrificing your super

Does salary sacrifice reduce taxable income?

Yes, salary sacrifice effectively reduces your taxable income. When you allocate a portion of your pre-tax salary to your super, it means you're taxed on a lower income amount. This can be especially beneficial if it brings you into a lower tax bracket, leading to potential tax savings.

How much can you salary sacrifice?

The amount you can salary sacrifice isn't just a standalone figure; it's part of a larger cap. The overall limit for concessional contributions, including what your employer puts in and your own salary sacrifice, is $27,500 for the 2022-2023 financial year. So, the room you have for salary sacrifice depends on your employer's contribution. For instance, if your employer adds $10,000 into your super, you can contribute up to $17,500 through salary sacrifice without exceeding the overall limit.

Is salary sacrifice worth it?

Deciding if salary sacrifice is worth it depends on your specific financial situation. It can be a smart move for reducing your tax bill and increasing your super savings, particularly for those in higher tax brackets. However, it's important to weigh the benefits against your immediate financial needs and long-term financial goals.

Is salary sacrifice a fringe benefit?

No, salary sacrifice contributions to super are not classified as fringe benefits. They are treated as concessional contributions within your super fund, enjoying a favourable tax treatment compared to your regular income.

What if my employer doesn't offer salary sacrificing?

If your employer doesn’t provide a salary sacrificing option, you can still boost your super through personal voluntary contributions. You have the option to contribute to your super from your after-tax income and potentially claim a tax deduction for these contributions, mirroring some of the benefits of salary sacrificing.

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Brad Buzzard
Brad Buzzard
Senior Money Writer

Brad brings over 25 years of experience in writing and consumer research to Mozo, using his RG146 certification for Generic Knowledge and Superannuation Brad has a knack for translating complex policies, to deliver practical guidance on financial matters. Brad has been featured in The Australian, B&T, Mumbrella, and Asia Insurance Review, and his insights have influenced the strategies of some of the world's biggest brands including McDonalds and Proctor & Gamble.