How to Salary Sacrifice for Superannuation
Short answer
Salary sacrificing super means arranging with your employer to redirect part of your pre-tax salary into your superannuation (retirement) fund. This reduces your taxable income and tax bill now while increasing your retirement savings. You decide how much to sacrifice, and your employer pays that amount into your super before tax is deducted.
What is salary sacrificing superannuation?
Salary sacrificing superannuation is a voluntary agreement between you and your employer to divert a portion of your gross salary directly into your super fund before your income tax is calculated. This means the sacrificed amount is not counted as immediate income but goes into your retirement savings instead. Your employer processes this through payroll, so the money moves automatically each pay period.
This differs from the compulsory employer super contributions, which are set by law and paid on top of your salary. Salary sacrificing is an extra contribution you choose to make, using part of your salary that would otherwise be paid as cash. Because super contributions are taxed inside the fund at a flat rate (generally 15%), this can reduce your overall tax compared to receiving the money as salary taxed at your normal rate.
Salary sacrifice can be a powerful way to build retirement savings earlier while paying less tax today. It can be especially helpful if you want to save more but find it difficult to set aside after-tax money.
How does salary sacrificing super work with an example?
Suppose your gross monthly salary is $4,000. Without salary sacrificing, you pay income tax on the full $4,000. Your take-home pay is your salary minus income tax and other deductions. Now, you decide to salary sacrifice $500 monthly to your super.
Here’s what happens:
- Your employer pays $500 directly into your super fund before tax.
- Your taxable salary reduces from $4,000 to $3,500.
- Income tax is calculated on $3,500, not $4,000.
- The $500 goes into your super fund, where it is taxed at 15%, generally lower than your personal income tax rate.
This means your tax bill now is lower because your taxable income is less. Meanwhile, your super balance grows with the $500 contributions plus investment earnings over time.
Breakdown example:
| Description | Amount ($) | Explanation |
|---|---|---|
| Gross salary | 4,000 | Your full salary before tax |
| Salary sacrificed | 500 | Amount redirected to super |
| Taxable income | 3,500 | Gross salary minus sacrificed amount |
| Tax on salary sacrificed | 75 (15% of 500) | Tax paid inside super fund |
| Tax on remaining salary | Based on tax brackets | Calculated on $3,500 |
This arrangement increases your retirement savings and can reduce your immediate tax burden.
Why does salary sacrificing super matter for you?
Salary sacrificing super is an effective way to boost your retirement savings while lowering your taxable income, which can reduce the tax you pay now. For many people, it means more money working for them in a tax-advantaged environment, helping to grow their future retirement fund faster.
This strategy is valuable if you want to save more but find it challenging to set aside after-tax income. It also helps those who want to manage their tax bracket or reduce taxable income to qualify for certain benefits or avoid higher tax rates.
However, it’s crucial to balance this with your current living expenses. The money you sacrifice is generally locked in super until you reach retirement age or meet other conditions. Therefore, avoid sacrificing more than you can afford to have unavailable now. Always consider your short-term cash flow before increasing contributions.
What terms are often confused with salary sacrificing super?
Many confuse salary sacrificing with related terms. Here’s what to know:
- Employer contributions: These are compulsory payments your employer must make into your super based on your salary (usually a percentage), separate from any salary sacrifice. These are not optional and do not reduce your taxable income.
- Salary packaging: A broader category of arrangements where your employer provides benefits (like cars or loans) by deducting their cost from your pre-tax salary. Salary sacrificing super is a type of salary packaging but focused solely on super contributions.
- After-tax contributions (non-concessional contributions): Money you put into your super fund from your take-home pay, without reducing your taxable income now. These are taxed differently and have separate limits.
- Tax deductions for super: You can claim a tax deduction yourself for certain personal super contributions, but salary sacrifice reduces your taxable income immediately through payroll before you get paid.
Understanding these distinctions helps you make informed decisions about retirement savings and tax planning.
How can you start salary sacrificing super?
Starting salary sacrificing super requires clear steps to ensure everything is set up correctly:
- Review your current super fund: Ensure you have an active super account you want your employer to contribute to. If you want to change funds, complete the necessary paperwork.
- Check if your employer offers salary sacrifice: Speak with your HR or payroll department to confirm they facilitate salary sacrifice arrangements and ask about their process.
- Decide on the amount to sacrifice: Choose an amount that fits your budget and financial goals. Remember to consider contribution caps to avoid penalties.
- Complete the salary sacrifice agreement: Your employer may require you to sign a formal agreement specifying how much and when to salary sacrifice.
- Confirm the start date: Agree on when the salary sacrifice will begin (often from the next pay period after paperwork is processed).
- Monitor your pay slip: After starting, check your pay slips to verify your taxable income is reduced and the salary sacrifice amount is shown going into super.
- Keep track of contribution caps: Regularly review your total concessional contributions (salary sacrificed plus employer contributions) to avoid exceeding limits.
If unsure, consult a financial adviser or tax professional to tailor your salary sacrifice plan to your circumstances.
What are the contribution limits and tax considerations to know?
The government sets annual concessional contribution caps that include your employer’s mandatory contributions and any salary sacrificed amounts combined. Staying within these limits is important because exceeding them can trigger extra tax penalties.
For example, if the concessional cap is $27,500 per year, and your employer contributes $15,000, then your salary sacrificed contributions should not exceed $12,500 that year to avoid excess contribution tax.
Salary sacrificed contributions are taxed at 15% upon entering your super fund, which is often lower than your personal income tax rate, making it tax-efficient. However, high-income earners may pay additional contributions tax.
These limits and tax rules can change, so check with the Australian Taxation Office (ATO) or a trusted tax advisor for the current figures and personalized guidance.
What other items can you salary sacrifice besides super?
Salary sacrificing is also used for other benefits depending on your employer’s arrangements, such as:
- Cars (novated leases): You can salary sacrifice to pay for a car lease and associated costs, potentially reducing your taxable income. Learn more in How to Salary Sacrifice a Car.
- School fees: Some employers allow salary sacrifice to cover private school fees, which can be tax-effective. See Can You Salary Sacrifice School Fees.
- Home loan repayments: Salary sacrifice can sometimes be arranged for mortgage payments, subject to employer policies. Read Can You Salary Sacrifice for a Mortgage for details.
Each type of salary sacrifice has specific rules and tax implications. Confirm what options your employer offers and evaluate which fit your financial goals.
Frequently asked questions
Can I salary sacrifice any amount into my super?
No, your total concessional contributions (salary sacrifice plus employer contributions) must stay under the government’s annual cap to avoid extra tax. Check the current cap with the tax authority and plan your salary sacrifice accordingly.
Will salary sacrificing reduce my take-home pay?
Yes, because part of your gross salary is paid into super before tax, your immediate cash pay is lower. However, because this reduces your taxable income, your overall tax bill may decrease, often offsetting the lower take-home pay.
Can I change or stop salary sacrificing whenever I want?
Usually, yes. Notify your employer of any changes or to stop salary sacrificing. Some employers require a notice period or specific forms, so check your workplace policies.
How is salary sacrificing different from after-tax super contributions?
Salary sacrificing uses pre-tax income to reduce your taxable salary immediately. After-tax contributions come from income after tax and do not reduce your taxable income now, though they still add to your retirement savings.
Is salary sacrificing super beneficial for everyone?
It benefits many who want to build retirement savings and reduce current tax, but individual situations vary. Consider your cash flow needs, retirement goals, and consult a financial adviser if unsure.