Salary sacrifice is a tax effective way to increase your superannuation balance. In essence it involves voluntarily sacrificing some of your salary into your superannuation account.
This article highlights important things to think about, including advantages and disadvantages, before you salary sacrifice.
Please note, this blog post covers salary sacrifice into superannuation; it does not cover other forms (which are more appropriately called salary packaging), such as mortgage, rent and car arrangements, which are available to certain employees.
Table of contents
What is Salary Sacrifice?
Salary sacrifice is a voluntary agreement between an employee and an employer, where the employee chooses to forego part of their salary and the employer pays the ‘sacrificed’ portion into the employees superannuation account. The primary reason people do this is to reduce tax.
Advantages of salary sacrifice
There are a number of advantages, but as mentioned above, the primary reason people salary sacrifice into super is to save tax. The sacrificed portion is taxed at 15% and this is often less than people’s marginal tax rate (the highest rate of tax paid on your income).
Save Income Tax
Salary sacrifice offers tangible financial benefits, and this is especially the case for higher income earners who are generally the biggest beneficiaries of salary sacrifice. This is because Australia has a progressive tax system – the more you earn the more you are taxed.
Tax Rates for 2024-25:
| Taxable income | Tax on this income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 16 cents for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30 cents for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37 cents for each $1 over $135,000 |
| $190,000 and over | $51,638 plus 45 cents for each $1 over $190,000 |
If you are earning more than $190,000 per annum, every dollar above $190,000 is taxed at 45 cents – you only get to keep 55 cents for every additional dollar earnt. However, if you salary sacrificed some of your income into your superannuation account, then the funds will only be taxed at 15% and you keep 85 cents. This is a saving of 30 cents for every dollar you salary sacrifice, or put another way, a reduction in tax of 30%.
If however you are earning $100,000, your marginal tax rate is 30% and you are already keeping 70 cents of every dollar you earn over $45,000. So salary sacrifice, and its 15% tax rate, will mean you keep only an extra 15 cents for every dollar you sacrifice into super. A 15 per cent tax saving is still nice; just not as nice as a 30 per cent saving.
It is worth noting that people whose combined income and concessional super contributions are above $250,000 must pay an extra 15% tax on their concessional contributions. This is known as ‘Divison 293‘. Regardless of this though, salary sacrifice is still beneficial.
AMP offer a simple calculator which will help you work out the financial benefit of this strategy according to your own individual situation.
Invest for the long term
We all need to invest for our future, and superannuation offers a great tax structure to do this.
When you add money to superannuation, you are putting it in a place with a maximum tax of 15% on earnings. Contrast this to the tax table above where some people are paying 45% on their investment earnings. In addition, the investment structure is already set up and in place so it is easy for you to build on your investment. It is a totally different story if you wanted to save, say, $5,000 per annum outside of super – most people would simply keep these funds in a bank account and not invest them.
Forced savings
The investments you hold within superannuation will have the benefit of compound growth for decades. And once you have added the money to super, there is nothing you can do to sabotage that. Let’s face it, it is all too easy to raid a savings account when something unexpected happens. This might be needing to replace a fridge, a mechanics bill or simply a deliberate decision to use the investment and go on a holiday. All these options are off the table once you have contributed additional funds into super. Salary sacrifice really is saving for your retirement lifestyle, not your current lifestyle.
Disadvantages of salary sacrifice
As with most things, there are pros and cons to financial planning strategies. Your individual situation and where you currently are in life will dictate which advantages and disadvantages impacts you and by how much. For instance, access to your super is less of an issue the closer you are to retirement.
Access
Contributions are preserved in super until you meet a condition of release which is usually retirement. That can be a long time away and the longer the time period the higher the risk that the government could make changes to superannuation law which makes it less attractive. Whilst I listed ‘forced savings’ as an advantage, it can also be a disadvantage if you really need funds but can’t access them because they are locked in the super system.
Concessional Contribution Limits and excess tax
It is important to be aware that there are limits on how much you can salary sacrifice. These limits are dictated by the ‘concessional contribution cap‘. Effective from 1 July 2024 the concessional contribution limit increased from $27,500 to $30,000. This still isn’t much though because concessional contributions include what you salary sacrifice as well as your employers superannuation guarantee payments. So if you are on a high income, the superannuation guarantee payments will use up a significant portion of the $30,000 and you can only salary sacrifice the remainder.
If you exceed the $30,000 limit, then you will likely pay your marginal tax rate on the excess amount as well as an additional excess concessional contributions charge which is is a notional interest charge.
Fees and Volatility
There are no fees if you keep your money in cash, and there are (supposedly) low fees if you keep money in a bank account or term deposit. By diverting money into superannuation, which would otherwise go into your bank account, you are increasing your fees. This is because superannuation funds have fees – administration fees and investment fees.
In addition, most people’s superannuation is invested in shares or other growth assets. Growth assets are volatile – they go down and up in value often on a daily basis. So the amount you salary sacrifice will probably go down in value at some point, and theoretically if you choose to invest in high risk investments such as a small mining company, you may lose it all. I list this disadvantage just to keep ASIC happy, but the reality is that if you made the same investment/s with funds held outside of super the result would be the same.
Death benefit tax
Because the salary sacrifice payments are concessional, they are considered ‘taxable’ at the date of your death. And if you die the ‘taxable’ portion of your super is taxed at 15%, plus the 2% medicare levy unless it is paid to someone classed as a ‘tax dependent’. Your spouse is a tax dependent, your adult children likely aren’t.
There are retirement planning strategies available which will either reduce or negate the above, however it is definitely something to be aware of.
Non-payment of salary sacrifice into superannuation
Unfortunately some employers don’t make the required superannuation contributions that they are legally obliged to do. And salary sacrifice contributions can be harder to check up on because employers don’t have to make super contributions according to your payslip time period. So, whilst the payslip displays a figure for super contributions for that time period, the amounts are usually accumulated and paid monthly. By law, they can be paid quarterly, so only four times a year. This makes it challenging to check contributions have been made properly, especially as super statements are usually only provided annually.
I would advise logging into your superannuation account or myGov to check contributions have been made.
How do I salary sacrifice?
Once you have decided you want to start salary sacrificing it is very simple to implement. You simply have a chat with your employer and inform them that you wish to salary sacrifice x% or $x of your future salary into super. They will likely already be doing this for other employees so won’t find this an unusual or problematic request. They won’t appreciate you changing the sacrificed amounts though, so try to determine the appropriate amount to sacrifice and not change it too often.
Be aware though, employers don’t make super contributions according to your payslip. Whilst a weekly payslip refers to the amount of superannuation for that period, it won’t be paid to the super fund till later; sometimes they only make four payments a year to the super funds.
If you would like independent wealth advice, please feel free to get in touch.
