Slow and steady wins
05 November 2018
Salary sacrificing is a great way to build your super fund and also access some serious tax benefits. So what exactly is salary sacrificing into super and what are the pros and cons to be aware of before kick starting your strategy?
What is salary sacrificing?
Salary sacrificing is a method of making extra contributions to your super fund out of your pre-tax income. This must be done via arrangement with your employer where a portion of your salary to be paid directly into super is agreed upon, on top of the required employer contributions. This means that your gross salary will be less before tax is calculated.
This is a very popular strategy for those on a high enough income to make the most out of the potential tax savings.
Salary sacrificing into your super has many potential benefits.
What are the benefits of salary sacrifice?
There are several major benefits to salary sacrificing into your super fund. These are:
- Tax benefits on your gross salary: Moving a portion of your income into your super fund before it is taxed reduces the overall amount of income tax you pay on your remaining salary.
- Lower tax rate on super contributions: No income tax will be levied on your super contributions when they leave your salary, however there is a tax when they enter your super fund. The tax rate for these contributions is 15% - considerably lower than the marginal tax rate is for the majority of people. This does mean however that to get any tax benefit you need to be earning over $18,200.
- Increased super growth: Making salary sacrifices also gives you more savings with which to retire comfortably with when the time arrives. Building your super consistently and early in your career can help you to grow a good-sized nest egg.
Are there any drawbacks to salary sacrificing?
In certain situations salary sacrifice may not be the most beneficial choice for everyone. Here are a few things to consider before deciding to regularly contribute to your super from your gross pay:
- Money locked away until conditional release: Savings kept in a super fund can only be accessed at preservation age (currently 60 for those born after July 1964). There are specific alternative circumstances which could lead to it being released, such as needing significant financial assistance or becoming totally and permanently disabled, but for most people this money is essentially locked away.
- Salary sacrifice limits: There are limitations to how much you can contribute to your super fund from your salary each financial year. This cap is currently $25,000 per annum for everyone and this includes both employer contributions and your salary sacrifice contributions.
- Not as appealing for low income earners: If your salary is lower than $37,000 there may be very limited tax benefits to a salary sacrifice arrangement. In this case other tactics to boost your super, such as government co-contributions, may be more effective.
Remember that super savings cannot be accessed until you are at the preservation age.
What should you check before starting salary sacrificing?
If you decide upon a salary sacrifice agreement with your employer there are several steps you should take before and during the agreement to make sure everything is running as it should. Make sure to check:
- Employer contributions don't drop: Make sure when setting up your agreement that your employer will continue to calculate your employer contribution on your gross income, before salary sacrifice. It is worth getting this guarantee in writing.
- Your super is being paid correctly: Check that the correct amount of salary contribution is being entered into your super. Your employer is under an obligation to pay all contributions to your super at least once a quarter, though they can do it more often. You can check your super payments by checking your myGov account, or if you’re an LGS member, you can do so by logging in to your account online.
- The tax benefits are worthwhile: It's worth working out exactly how much tax savings you will make and using this to determine whether your salary sacrifice strategy is working well for you. If you need help determining your savings plan it may be worth talking with an authorised financial planner.
How to start salary sacrificing
Starting a salary sacrificing arrangement is pretty straight forward. The first and most important thing you will need to do is work out how much of your salary you can comfortably give up whilst also meeting your savings goals.
Once you are sure of the amount that you wish to sacrifice, you will need to have your employer agree to regularly redirect that amount to your chosen super fund. Make sure you have written confirmation from your employer stating the exact details of the agreement.
If you are considering salary sacrificing to your super but are unsure whether it's the right step for you, get in touch with our team at LGS. We can help you develop a super strategy that works best for you.
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