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3 things you need to know about salary sacrifice

December 15th, 2020

Looking to contribute extra to your super but not sure how to go about it?

One of the easiest ways to boost your balance is by “sacrificing” part of your salary into super.

Salary sacrifice is where you give up (sacrifice) part of your pre-tax pay to make additional contributions to your super account. Your employer makes these payments on your behalf, and they are taxed at 15% instead of at your usual tax rate. These contributions go into your account on top of those your employer already makes for you.

To help you decide if salary sacrifice is right for you, here are three key things you need to know.

  1. You’re in control

You can start, stop, increase or decrease your salary sacrifice contributions at any time. Simply arrange this with the payroll team at your workplace.

For example, if you’re making regular contributions but finding money is a bit tight, you could reduce the amount you sacrifice to get more of your salary back.

On the other hand, if you’re feeling comfortable financially, you could dial up your contributions and really focus on growing your super balance for the future.

  1. You could save on tax

Salary sacrifice contributions are taxed at 15%, which may be lower than your income tax rate. If that’s the case, not only are you saving for the future, you could also save on tax. How, exactly?

Because salary sacrifice contributions are taken out of your salary before you pay income tax, you’re effectively reducing your take-home pay. That means you’ll pay income tax on a smaller amount, giving you an immediate tax saving.

But hold up – is salary sacrifice tax effective for everybody? It may not be if you’re on a lower income. This is because there’s not much difference between your income tax rate and the super tax rate, so the savings are lost. If this is your situation, there may be more effective ways to contribute, such as the Super Co-contribution.

  1. You must stay under the $25,000 cap

Even if you had the money, you couldn’t top up your super endlessly without getting hit with tax. There are limits on super contributions called “concessional” and “non-concessional” caps.

Salary sacrifice contributions count towards the “concessional” cap, which is limited to $25,000 per financial year. Go over and you’ll be penalised by the Australian Taxation Office.

How can you avoid going over? Be aware of things that could increase your contributions, like voluntarily contributing more yourself, or a pay rise that results in a higher amount of super from your employer.

  • The best way to stay on top of your contributions is by checking your transactions in our member portal, firstonline.

NEXT STEPS

To start salary sacrificing, speak to the relevant payroll contact at your workplace.

Want more information first? We’ve got you covered.