Salary sacrifice to grow your super

What does it mean to salary sacrifice?

When you salary sacrifice into superannuation, you are making an agreement with your employer to direct a specified amount of your salary into your superannuation account as opposed to taking it through your salary. As this payment is made before tax it does not attract your marginal tax rate, instead it incurs a deduction of a 15% superannuation contributions tax.

For someone with a marginal tax rate of 34.50%, choosing to salary sacrifice $100 means a choice between
– having $65.50 today in their pay, or
– having $85.00 tomorrow in their superannuation.

The main reason for considering salary sacrifice is that it is a tax effective, long term means of boosting your retirement balance for a comfortable lifestyle. By investing your money before tax it should allow you to invest more money than doing so with after tax dollars. The tax benefits also extend to any profits made within your superannuation account, which are also taxed at 15%.

As a Corporate Superannuation Relationship Manager of a large superannuation fund, I work alongside many Corporate Superannuation Consultants to add value to our members. Of these, I find that the companies that work with Harvest are the most active and engaged when it comes to making additional contributions to their superannuation, actively choosing their investment options, and accessing their superannuation online to take control of their superannuation.

Some things to consider

Like all other contributions to superannuation, salary sacrifice contributions cannot be accessed until you reach your preservation age and retire. So, unlike personal savings, the money cannot be withdrawn to meet other financial needs once the contribution has been made.

The higher your tax bracket the more effective salary sacrifice becomes, the real benefits kick in once you earn over $37,000 per annum. At this point your marginal tax rate is 34.5% (including medicare) which is more than double the concessional tax rate for superannuation.

Before entering into a salary sacrifice arrangement with your employer, you should ensure the amount to be sacrificed plus the employer’s Superannuation Guarantee, does not exceed the relevant age-based Concessional Contributions Cap (read here for more information on caps).

Whether you should participate in salary sacrifice depends on your personal financial circumstances. If you are unsure, a Harvest financial adviser can help you assess your situation and put into place a plan that will work for you.

We have included a case study for you to consider:

Paul is 45 and receives a salary of $75,000 p.a., he decides to salary sacrifice $10,000 p.a. ($833 per month) into his super. By re-arranging his package Paul has boosted his super by $8,500, and only reduced his take home pay by $6,525 ($543 per month). Paul has effectively given himself a 2.6% pay rise (see calculations below).

Calculations: