Salary Sacrifice is an arrangement where an employee agrees to forego a portion of their pre-tax salary as an additional contribution to their Super account.
It is a strategy that helps to increase your Super balance, while reducing your assessable income, i.e. tax payable.
Remember, Super accounts are taxed concessional, not at your marginal tax rate.
With increasing life expectancies, it’s important to plan ahead for your retirement years and salary sacrificing can help.
For many, relying on the superannuation guarantee (eg) won’t be enough to fund an ideal retirement, so salary sacrifice is an approach that may be suitable.
If you are looking to boost your nest egg with the intention of an earlier or longer lasting retirement or perhaps considering tax-effective strategies, speak to a financial adviser.
3 ways salary sacrifice can help you boost your retirement:
1. Its; tax effective
Income tax is payable only on income you actually receive, so you do not pay income tax on salary sacrifice contributions to super. Your super contributions are taxed at a maximum rate of 15%, representing a significant tax saving – particularly if you are on the highest marginal tax rate.
Also, by making a salary sacrifice contribution, it’s possible that your taxable income is reduced and you are brought down into a lower income tax bracket, further reducing your income tax position.
2. More Money is available for investment
This difference in taxation means that more money is available for investment, rather than if you were to receive the money as after-tax income and then invest it.
3. You pay less tax on returns from your super investments
The maximum tax on investment earnings from your super is 15%. This is often significantly better than the tax on returns outside Super.
While there are possible benefits from making additional contributions to your super fund via salary sacrifice, be aware there are rules around this strategy and penalties for exceeding contribution limits.
Before implementing a strategy such as salary sacrifice, it’s important to seek financial advice. This will assist you maximise the tax benefits from your super and other investments, helping you to achieve your ideal retirement.