What is salary sacrificing and is it for me?
It sounds like some sort of sacrificial ritual for your paycheck, but don’t worry it’s neither complicated nor sinister.
Salary sacrificing is simply asking your employer to pay an additional amount each paycheck into your superannuation fund. Your employer will set up salary sacrificing for you, you just have to ask.
The benefit of salary sacrificing
Because your super is tax free to an extent, salary sacrificing reduces your taxable income so that you pay less tax over your working life. As a bonus, you will retire with more super because you are simply putting more into your super and through the wonders of compound interest. It’s a triple benefit strategy.
Is salary sacrificing for me?
- Can you afford it? – You will have less money each month to cover your expenses, so make sure you can afford to salary sacrifice.
- Will you save tax? – If you earn less than $45,000 per year, the tax savings won’t be enough to justify salary sacrificing.
- Contributions Cap – There is a limit to the amount of super you can save before you start paying tax on your super at the marginal tax rate. For 20/21, the limit is $27,500 for the financial year. Check the ATO’s concessional contributions cap page to ensure you don’t go over the cap. The limit can change year by year so stay informed. For example, it was as much as $35,000 for the 2016-2017 financial year.
- Age restrictions The concessional contributions cap is currently for all ages but this has not been the case historically so you must check each year. For example, it was $30,000 for under 49’s and $35,000 for over 49’s for the 2016-2017 financial year. It was as much as $100,000 in 2008-2009 for the 50+ age bracket!
- Unused concessional cap – If your total superannuation balance is less than $500,000 you might be able to go over the concessional contributions cap for up to five years from the 2019-2020 financial year.
- Wait till retirement – Aside from special circumstances such as the First home super saver scheme, you won’t be able to touch your contributions until retirement.