What Is Salary Sacrifice & How Does It Work?
Salary sacrificing into superannuation is one of the most tax-effective ways to build wealth for your retirement. By redirecting part of your pre-tax salary into your super account, you can reduce your taxable income while taking advantage of the concessional tax rates within superannuation.
In this guide, we’ll explain what salary sacrifice is, how it works, its benefits, and the risks involved. We’ll also provide an example to demonstrate the potential savings and advantages of salary sacrificing.
What Is Salary Sacrifice?
Salary sacrifice, also known as salary packaging, is an arrangement between you and your employer where you choose to forgo a portion of your pre-tax income in exchange for additional superannuation contributions.
The key purposes of salary sacrificing include:
- Reducing taxable income: Lowering the income on which you pay tax.
- Boosting retirement savings: Growing your super balance faster in a tax-efficient environment.
Salary sacrifice contributions are classified as concessional contributions, taxed at 15% upon entry into your super account. For high-income earners (above $250,000 per year), these contributions incur an additional 15% tax, known as Division 293 tax.
How Does Salary Sacrifice Work?
- Set Up the Arrangement
Speak with your employer or payroll office to set up a salary sacrifice arrangement. You’ll need to specify how much of your salary you wish to sacrifice each pay cycle. - Contributions
Your employer will direct the sacrificed amount into your nominated superannuation account, in addition to the mandatory 11.5% Superannuation Guarantee (SG) contributions. - Monitor Contributions
Salary sacrifice contributions count towards your concessional contributions cap, currently set at $30,000 per financial year. It’s important to ensure your combined employer SG contributions and salary sacrifice contributions don’t exceed this limit to avoid penalties.
How Much Can You Salary Sacrifice?
To calculate the maximum amount you can salary sacrifice:
- Determine your employer SG contributions: Multiply your annual salary by the SG rate (11.5%).
- Subtract this amount from the concessional cap: The remaining balance is the maximum you can salary sacrifice.
For example:
- Annual salary:
$100,000
- SG contributions:
100,000×11.5%=$11,500
- Maximum salary sacrifice:
30,000−11,500=$18,500
If you make additional personal concessional contributions, these also count towards the cap, so be sure to factor them in.
Benefits of Salary Sacrificing
- Lower Taxable Income
Salary sacrificing reduces your assessable income, lowering the amount of tax you pay. Contributions to super are taxed at 15%, which is usually much lower than marginal tax rates. - Tax-Efficient Growth
Earnings within your super fund are taxed at a maximum of 15%, compared to personal investment earnings, which are taxed at your marginal rate. - Forced Savings
Super contributions are preserved until retirement, encouraging disciplined, long-term saving. - Offsetting Insurance Costs
Salary sacrifice contributions can help cover insurance premiums within your super fund, minimizing the impact of these costs on your balance.
Risks of Salary Sacrificing
- Inaccessible Funds
Contributions made through salary sacrifice are preserved within super and generally cannot be accessed until you meet a condition of release, such as reaching preservation age (typically 60). - Contributions Tax
A 15% tax is applied to all salary sacrifice contributions. For high-income earners, an additional 15% tax (Division 293 tax) applies. - Investment Risk
Superannuation funds invest contributions in various asset classes, which are subject to market fluctuations and potential losses. - Employer Mismanagement
Employers may fail to contribute the agreed amounts. It’s essential to monitor your super account to ensure payments are made correctly.
Salary Sacrifice Example
Here’s a practical example to illustrate the potential benefits of salary sacrificing:
2024/25 | No Salary Sacrifice | With Salary Sacrifice |
|---|---|---|
Wage (A) | $100,000 | $100,000 |
Salary Sacrifice (B) | $0 | $18,500 |
Assessable Income (A-B) | $100,000 | $81,500 |
Income Tax Payable (C) | $22,788 | $16,868 |
After-Tax Income (A-B-C) | $77,212 | $64,632 |
Contributions Tax @ 15% (D) | $0 | $2,775 |
Total Tax Payable (C + D) | $22,788 | $19,643 |
Benefit of Salary Sacrifice | — | $3,145 |
Explanation:
- Without salary sacrifice, your taxable income remains at $100,000, and you pay $22,788 in tax.
- By salary sacrificing $18,500, your taxable income drops to $81,500, reducing your income tax. Although contributions tax of 15% applies to the sacrificed amount, you still achieve a net tax saving of $3,145.
This example demonstrates how salary sacrificing can lower your tax liability while significantly boosting your retirement savings.
How Much Should You Salary Sacrifice?
Here are some key guidelines for determining how much to sacrifice:
- Affordability: Ensure you can still cover your living expenses after salary sacrificing.
- Contributions Cap: Stay within the $30,000 concessional contributions cap.
- Maximize Tax Savings: Only sacrifice amounts that result in a net tax benefit. Contributions beyond this may not provide additional savings.
Salary sacrificing is a powerful strategy for boosting your superannuation and reducing your tax. By contributing pre-tax income to your super, you can grow your retirement savings in a tax-efficient way while preparing for a financially secure future.
At Point B Planning, we specialize in personalized superannuation strategies to help you make the most of your retirement savings. Contact us today to explore how salary sacrificing can work for you.
