Salary sacrificing is one of the easiest ways of contributing to your superannuation.
Salary sacrificing is a way of contributing to your super and involves diverting part of your salary into your super fund. Salary sacrificing into your super comes with tax benefits, making it an attractive option for anyone looking to top up their super balance.
This guide will explain how salary sacrificing into your super works, how to set it up and what to consider before going ahead. If salary sacrificing isn’t for you, we’ve also outlined some other ways of contributing to your super.
How salary sacrifice into superannuation works
Salary sacrifice is the process of redirecting a percentage of your salary or wage into something else. You can set up a salary sacrifice agreement with your employer to help pay off a car, your mortgage payments or to top up your super.
Salary sacrifice into your super fund means, come payday, a percentage of your wage will be sent to your super account rather than into your bank account. These are classed as concessional contributions, because the money that’s sent to your super account is diverted before you’re charged any income tax on it. This is the main benefit of salary sacrificing into your super.
You can elect how much of your pre-taxed income you want to send to your super account instead, although limits do apply (we’ve outlined these limits below). If you want to salary sacrifice into your super this is something you can arrange directly with your employer instead of with your super fund.
Salary sacrificing into your super has many benefits
- Pre-tax super contributions. Salary sacrificing is classed as a concessional contribution, meaning it’s part of your pre-tax income. This money will instead be taxed at the reduced super tax rate of 15%, rather than your marginal tax rate which could be as high as 45%.
- Set-and-forget strategy. Salary sacrificing into your super is a great way to make passive contributions to your super. Once you’ve set it up there’s nothing else you need to do – the contributions will automatically be made each time your employer pays you.
- Your employer handles the admin. Your employer will set up your salary sacrifice contributions with your super fund, so there’s not much admin involved for you.
- Benefit from compound returns. By making regular contributions to your super from a young age, you’ll benefit from compounded investment returns.
- No fees. There are no fees charged to make concessional contributions to your super via salary sacrifice.
- Benefits to those earning more than $37,000. Those with a salary above $37,000 stand to benefit the most from salary sacrificing into super. Instead of paying the marginal tax rate of up to 45%, that income will instead only be taxed at 15%.
What to consider before salary sacrificing into super
Salary sacrificing has many benefits, but there are also a few things to consider before setting it up.
- It’s part of the super guarantee. Your employer is required to pay you the super guarantee, which is currently set at 9.5% of your salary. If you elect to salary sacrifice part of your wage into your super, this is counted as part of the super guarantee from your employer rather than another contribution on top of this, unless you negotiate otherwise.
- Less money at payday. If you elect to send a portion of your salary to your super you’ll end up with less money in your bank account come payday.
- You can’t access the money. Once you’ve sent the money to your super fund, you can’t access this money until you retire or reach your preservation age. So it’s important to ensure you won’t need the money to meet your financial obligations, such as rent, bills or in the event of an emergency.
- Limits apply. There are limits as to how much you can contribute to your super, which are outlined below.
- Not worth it if you earn below $37,000. If you earn below $37,000 your income is only taxed at 19%, so it might not be worth salary sacrificing as you’d only be taxed 4% less.
There are limits to how much you can salary sacrifice into super
Salary sacrificing is classed as a concessional contribution and there are limits as to how many concessional contributions you can make each year. Your concessional contributions can’t be more than $25,000 p.a., which includes both your salary sacrificed contributions and those made by your employer as part of the super guarantee.
As an example, let’s say you earn $150,000 a year. To meet the 9.5% super guarantee requirement your employer needs to contribute $14,250 to your super a year. This means you can only make up to $10,750 worth of additional pre-tax contributions.
How else can I make contributions to my superannuation?
There are four main ways you can contribute to your super.
- Employer contributions. This is the main source of money paid into an individual’s superannuation account. According to the superannuation guarantee, an employer must pay at least 9.5% of an employee’s gross salary into their super account every quarter.
- Concessional contributions. You can arrange for your employer to pay some of your pre-tax salary into your super fund as an additional contribution, known as salary sacrifice. But remember, your contribution allowance is capped at a maximum of $25,000 a year including all your employer and concessional contributions.
- Non-concessional contributions. A non-concessional contribution is one you make from your post-tax salary. This means you’ve already received the money into your bank account and paid the full tax rate. The cap for these contributions is currently $100,000 a year.
- Government contributions. If you earn below $36,813 you may be eligible for the government super co-contribution. This means that if you choose to make non-concessional (post-tax) contributions, the government will add $0.50 for each dollar you deposit up to $500.
Top tips to grow your super
Here are some tips that will help you maximise your super:
- Take advantage of tax breaks. As outlined above, making pre-tax concessional contributions comes with tax benefits. Speak to your employer about setting up a salary sacrificing arrangement.
- Dump your fund if necessary. Make sure you are constantly monitoring your fund's performance, especially long term. If the investment option is performing poorly, it's time to do something. It's also important to check the fees rather than just the fund's performance. You can compare funds in our table below to see how yours stacks up.
- Accept more risk. Generally the greater the risk the greater the potential return. One of the best ways to get more from your super involves adopting an age-based investment strategy. This includes working out how much risk you can afford to take based on your years to retirement. Age is crucial because if you have longer to wait until your retirement, you'll have more time to recover from a major setback and can comfortably accept more risk.
- Start early, make more. Starting to save from an early age can make a huge difference to how much you have when you retire, mainly due to the power of compounding. For example, if someone saved $10,000 a year for 20 years while someone else saved the same amount for 35 years, both earning a return of 6% a year, the 20-year compounding amount would generate $367,856 compared to the 35-year saver which would generate $1,114,348 – more than three times as much.