When you make a sacrifice, you're usually giving something up with the expectation of future gain.
Salary Sacrificing into your super is no different, you’re giving up ready
access to your money in your take-home pay. But in return you’re boosting your
retirement savings and saving on tax.
You can pay extra cash into your super from your pre-tax salary at the
concessional 15% rate of tax (30% if you earn over $300,000 p.a.) —up to a
limit (or cap) of $30,000 for 2016/17 (or $35,000 if you were 49 or over on 30
June 2016). That’s a considerable tax saving for most people on their usual
marginal tax rate.
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Let’s look at how salary sacrifice could work in practice.
Judith, aged 50, is a teacher earning $80,000 a year. She currently puts
$385 per fortnight into her online savings account (approximately $10,010 a
year) and wants to start building up her retirement savings.
She is considering whether to make:
- an after-tax contribution into superannuation of $10,010 a year, or
- an equivalent pre-tax (salary sacrifice) contributions
After-tax contributions v salary sacrifice
for Judith (2015/16)
Judith’s income tax position:
|
After-tax contributions
|
Salary sacrifice contributions
|
Gross salary
|
$80,000
|
$80,000
|
Less salary sacrifice contributions
|
Nil
|
($15,238)
|
Reduced gross salary
|
$80,000
|
$64,672
|
Income tax, Medicare levy
|
($19,147)
|
($13,829)
|
Net salary
|
$60,853
|
$50,843
|
After-Tax contributions to super
|
($10,010)
|
Nil
|
Take-home pay after contributions
|
$50,843
|
$50,843
|
Net income tax saving
|
|
$5,318
|
Judith’s
super contributions position:
|
|
|
Super Guarantee contributions (9.5%)
|
$7,600
|
$7,600
|
Salary sacrifice (pre-tax) contributions
|
Nil
|
$15,282
|
15% contributions tax
|
($1,140)
|
($3,439)
|
Total net concessional contributions
|
$6,460
|
$19,489
|
Plus non-concessional contributions to super
|
$10,010
|
Nil
|
Total net contributions
for year
|
$16,470
|
$19,489
|
Additional
net contributions into super
|
|
$3,019
|
In both scenarios, Judith’s take-home pay is the same. But by salary
sacrificing into super, Judith can increase her super contributions for the
year by $3,019, even after taking the 15% contributions tax into account.
Salary sacrifice checklist
Salary sacrifice isn’t without pitfalls. You’ll need to make sure you don’t
unintentionally go over your contributions cap or reduce your other
entitlements.
Here’s a handy checklist to make sure that you’ve ticked all the boxes.
1. Make sure that you can salary sacrifice
- Does your employer allow salary sacrifice?
- Are you under age 75?
2. Complete your employer’s standard salary sacrifice paperwork
You can’t salary sacrifice income already earned.
- Plan ahead to sacrifice bonus and leave payments.
3. Make sure your other entitlements aren’t affected
Check with your employer:
- how your super guarantee is calculated
- the definition of ‘salary’ used to work out your payments.
4. Monitor your concessional contributions cap
Check all concessional contributions for the financial year. These
include:
- compulsory contributions paid by your employer – such as the super guarantee
- contributions from a previous role within that financial year
- pre-tax contributions on top of your super guarantee
- administration fees and insurance premiums paid by your employer
- contributions allowed as an income tax deduction – such as contributions you make if you are self-employed
- notional taxed contributions if you are a member of a defined benefit fund
5. Get the agreement in writing
- Every employer is different. Make sure you know when your contributions are paid within the financial year so you don’t go over your concessional contributions cap.
6. Set up a notification
- Download the AMP app and set up an alert to notify you when your payments reach your account and when you are approaching your super cap.
So don’t delay. Make sure you get your salary sacrifice arrangements
in place to make the most of this financial year. You’ll soon see the
difference when you next look at your super balance.
Important information
© AMP Life Limited. This provides general information and hasn’t taken your
circumstances into account. It’s important to consider your particular
circumstances before deciding what’s right for you. Although the information is
from sources considered reliable, AMP does not guarantee that it is accurate or
complete. You should not rely upon it and should seek qualified advice before
making any investment decision. Except where liability under any statute cannot
be excluded, AMP does not accept any liability (whether under contract, tort or
otherwise) for any resulting loss or damage of the reader or any other person.