Salary Sacrifice

What is Salary Sacrifice

Salary sacrificing into super is a clever way to save for retirement and cut down on your tax. Salary sacrifice is like making a deal with your future self. You give up a portion of your salary, and in return, your superannuation gets a nice boost. The best part? You reduce your taxable income, which means you pay less tax today. Your super grows in a tax-effective environment, and you get a head start on retirement savings.

How Does Salary Sacrifice Work?

Just chat with your employer or payroll team. Let them know how much of your salary you want to sacrifice into your super. They’ll handle the rest. If you’ve got multiple super accounts, you can direct the contributions wherever you like. Simple, right?

How Much Can You Salary Sacrifice?

Your salary sacrifice contributions count toward the $30,000 concessional contributions cap each year. The catch? You need to factor in the mandatory employer contributions and any other personal deductible contributions to figure out how much you can actually sacrifice.

Only salary sacrifice as much as you can afford. You still need to be able to cover your lifestyle expenses and any upcoming capital expenses. Remember, once its contributed to super, you can’t touch it again until you retire.

Only salary sacrifice to the point that there is a financial benefit. Salary sacrificing reduces the amount taxed at your individual tax rate, but contributions tax of 15% is payable. So, usually, there is no benefit salary sacrificing an amount that takes you below the tax-free threshold, because if you’re not going to pay income tax anyway, why pay contributions tax.

What Are Salary Sacrifice Super Limits?

In the 2024/25 financial year, your salary sacrifice super limits are calculated by taking $30,000 (the general concessional contribution cap) and subtracting your employer contributions and any personal concessional contributions you've made. But wait – if you’ve got unused concessional contributions from previous years, you could be eligible to contribute more than the standard cap. So, let's dig into this!

What is the Concessional Contribution Cap?

The concessional contribution cap is essentially the maximum amount you can contribute to your super. This cap is $30,000 per year. But, here's the kicker, if your super balance was below $500,000 on 30 June 2024, you can carry forward any unused concessional contribution cap from the past five years. That means, if you didn’t use the full cap in prior years, you could sacrifice more into super this year.

What Are Employer Super Contributions?

Your employer super contributions are the mandatory amounts your employer is required to pay into your super. These contributions are based on your wage, and most employers must contribute at least 11.5% of your salary into your super fund. For some of you, it might be more, depending on industry agreements or contracts.

Now, here’s the important part, employer contributions count towards your concessional cap. So, the more your employer contributes, the less you can salary sacrifice. It’s all about balancing your contributions to avoid going over the cap.

What Are Salary Sacrifice Contributions?

Salary sacrifice super contributions are simply amounts of your pre-tax salary that you’ve agreed to sacrifice in exchange for your employer making larger contributions to your super. You’re basically redirecting part of your salary straight into your super account, and yes, this counts towards your concessional cap.

What Are Personal Concessional Contributions?

Personal concessional contributions are when you decide to contribute to your super from your own bank account, but you want to claim a personal tax deduction for it. To do this, you need to notify your super fund and let them know you’re claiming the tax deduction. These contributions also count towards your concessional cap and will reduce the amount you can salary sacrifice.

What’s the Maximum You Can Salary Sacrifice Into Super?

The maximum amount you can salary sacrifice is your concessional contribution cap minus any employer contributions and personal concessional contributions.

Benefits of Salary Sacrificing

-  Lower Income Tax: Less of your salary is taxed at your personal rate because it’s going straight into your super.

-  Tax-Friendly Earnings: Inside super, earnings are taxed at just 15%. Compare that to the higher tax rates if you invested outside super—pretty sweet, right?

-  Forced Saving: You can’t touch your super until retirement. So, no impulse buys on that new car or that cute but unnecessary puppy.

- Insurance: If you’ve got life insurance within your super, salary sacrificing can help cover the premiums without draining your super balance.

Risks to Keep in Mind

- Locked Away until Retirement: You won’t be able to touch it until you’re over 60, so only sacrifice what you won’t need until then.

- Check Your Contributions: Make sure your employer is paying the right amount into your super. Keep an eye on your super account to make sure it’s all going as planned.

- 15% Tax: When your salary sacrifice hits your super, it’s taxed at 15%. If you earn over $250k a year, you’ll pay an extra tax penalty. On the flip side, if you earn under $37k, you might get a refund on that tax.

-  Investment Risk: Any money you put into super will be invested, so it’s subject to market ups and downs. Be sure you're okay with the investment risks before diving in.

Salary sacrifice is a smart way to boost your super and save on tax, but make sure you weigh the pros and cons, are clear on your future needs, and always keep track of your contributions before jumping in!

Salary Sacrifice example:

Let’s go through an example on how salary sacrificing works and how it can benefit you. Let’s say you earn $100,000 per year and you need $50,000 per year to cover living expenses. Your employer pays the standard 11.5% SG amount in addition to your wage.

The table below compares a situation where you do not salary sacrifice and where you do:

2024/25	No Salary Sacrifice	Salary Sacrifice
Wage (A)	$100,000	$100,000
Salary Sacrifice (B)	$0	$18,500^
Assessable Income (A-B)	$100,000	$81,500
Income Tax Payable (C)	$22,788	$16,868
After-Tax Income (A-B-C)	$77,212	$64,632
Contributions Tax @ 15% (D)*	$0	$2,775
Total Tax Payable (C + D)	$22,788	$19,643
Benefit Of Salary Sacrifice		$3,145

^This is the maximum that can be salary sacrificed due to receiving $11,500 ($100,000 x 11.5%) in SG contributions, leaving $18,500 before reaching the $30,000 concessional contributions cap.*Excludes contributions tax on the SG contributions.

You can see in both scenarios in the table above, you still have sufficient after-tax income to cover living expenses of $50,000. However, you have significantly reduced tax payable for the year via salary sacrificing into super. The only catch? You can’t touch it until you retire.

What Happens if You Go Over the Cap?

If you go over the concessional contribution cap, you’ll be hit with some serious tax. Excess contributions are taxed at your individual tax rate, with a 15% offset to account for the tax already paid on your salary sacrifice. So it won’t be as brutal as it sounds, but still, you’d prefer to avoid it. The ATO will notify you about how much you’ve exceeded the cap and will give you two options:

1. Withdraw 85% of the excess, plus any earnings on it.

   
   

2. Leave the excess in your super, but it’ll count towards your non-concessional cap (and that could get messy if you end up going over that cap too, with a 47% tax penalty).

   
   

Should You Salary Sacrifice Into Super?

Deciding whether you should salary sacrifice into super depends on your personal circumstances. Salary sacrificing lets you invest more in your super while reducing your personal income tax, but you won’t be able to access the money until you retire or reach the appropriate conditions. So, if you’re comfortable with locking away some of your salary for the long term, it’s a solid strategy.

Important note: You’ve got to be careful to stay within the limits to avoid penalties. Be sure to double-check with your super fund and employer to ensure you’re on the right track.

Salary Sacrifice Super Form

There’s no fancy “salary sacrifice form” to fill out. What matters is that you have a clear agreement with your employer about how much you want to salary sacrifice, and that the terms are documented in your employment contract. You can amend or renegotiate your salary sacrifice arrangement whenever you need to — as long as it’s in line with your contract.

All salary sacrifice contributions must go into a complying super fund, so check that your super fund is up to snuff before setting up any contributions.

In summary, salary sacrificing can be a fantastic way to boost your retirement savings while giving you some immediate tax relief. Just make sure you’re aware of the limits, the rules, and the potential for extra contributions from previous years.