When you start your first full time job, you might come across something called salary sacrificing. Don’t worry it’s not some scheme or financial scam. In this video I’m going to explain what salary sacrificing is, specifically for superannuation.
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Disclaimer: I am not a financial adviser, I am not an accountant, I am not a tax adviser. This video and my channel is for general information only, as with anything in life you should do your due diligence and seek independent advice.
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So what is salary sacrificing, well as its name implies it involves sacrificing part of your salary for a benefit. Salary sacrificing is also know as salary packaging or total remuneration packaging.
What that benefit is will depend on your employer but the most common benefits include superannuation, electronic devices like your phone or laptop and cars.
In this video, we will focus on superannuation as it’s the most common benefit that people will salary sacrifice for. One thing to note is that many small businesses won’t offer salary sacrificing because of the logistics and costs involved.
Salary sacrificing super involves having a portion of your before-tax salary or wages paid directly into your super account. You might be wondering why people would do this, after all there’s no better feeling than seeing your salary hit your bank account.
Well the main reason is to minimise your tax! That’s right, the main benefit of salary sacrificing into super is to reduce the tax you have to pay.
So when it comes to salary sacrificed super contributions, they are classified as concessional contributions which means they are usually taxed at the concessional rate of 15%, which will typically be lower than your marginal tax rate (that is the tax you pay on your salary and other income).
This might be a little confusing, so let’s go through an example - meet Sam, he’s a professional gamer earning $85,000 and he salary sacrifices $5,000 into super, doing so means he will pay $750 in contributions tax instead of $1,725 in income tax, giving him $975 more to invest.
It’s important to note that while there’s no limit on how much you can salary sacrifice into super, this limit is called the concessional contributions cap. And if you go past this cap, the excess contributions will be included in your taxable income and will be taxed at your marginal tax rate. The cap includes any salary sacrifice contributions you make AND the compulsory super guarantee your employer has to make.
The cap is currently $25,000 a year but will increase to $27,500 from the 1st of July 2021.
Another advantage of salary sacrificing super is that you will be reducing your taxable income.
For example, if your income was $80,000 per year before tax, and you choose to receive $70,000 as income and salary sacrifice $10,000 into your super. The Australian Taxation Office (ATO) says you’ll only pay income tax on your reduced salary. This means your taxable income would be reduced to $70,000 in this hypothetical scenario.
Salary sacrificing into superannuation can also help you save for your first home. Under the government’s First Home Super Saver Scheme, first home buyers can withdraw up to $30,000 in voluntary super contributions to buy their first home. As part of the 2021 federal budget, this amount was increased to $50,000.
Now there’s some debate on whether this scheme is actually beneficial in the long run, so make you consider your own financial situation before deciding to do so - ideally consult a financial adviser.
Now there are some disadvantages to salary sacrificing into super and the first one is that any contributions you make are locked up until you reach your preservation age which for most people watching this video will be 60 years old.
There are some exceptions that allow you to have early access to your super like during the pandemic last year when people who suffered financial hardships could withdraw a maximum of $10,000 from their superannuation.
Another disadvantage is specifically for high income earners, if your combined income and concessional contributions is over $250,000 - you will have to pay an additional 15% contributions tax - which means a total 30% contributions tax.
But if you do earn that much, you probably have a financial advisor and are not watching this video.