What is salary sacrifice?
Salary - Is a fixed regular payment made by an employer to an employee.
Sacrifice - is an act or giving up something that values for the sake of something that may be of greater importance.
Putting together these two definitions may help clarify what salary sacrifice is giving up salary for the sake of something important. What the dictionary doesn’t tell us is how this works in practise and why salary sacrificing to super may be beneficial depending on your personal circumstances.
Most employees receive employer super guarantee contributions of at least 9.25% of their salary. Many also top-up their super using available money at the end of the financial year. A third option, which can be an easy, tax-effective way of topping up your super, is to salary sacrifice to super. This involves agreeing with your employer for some of your pre tax salary to be paid directly to your super fund,before income tax is deducted. The sacrifice comes from not having that amount paid to you as in your salary sacrifice can be an effective way to save for retirement.
You don’t pay income tax on amounts you salary sacrifice to super, instead your super contributions are usually taxed at 15%, which can be much less than your marginal tax rate.
In addition, if you are a higher income earner you may pay a lower rate of income tax if you salary sacrifice and your remaining salary may fall into a lower income tax bracket.
As well as helping your savings grow by having more to invest, salary sacrificing to super can mean higher investment returns, once you take tax into account. This is because the maximum tax on investment earnings from super is 15%. The same investment earnings outside super are taxed at your marginal tax rate, up to 46.5% Including medical levy.
Salary Sacrificing to super can help to ensure you have a sufficient super balance to support you in your retirement.
Contribution caps are limits set by the governments restrictions on how much super contributions you can make at concessional tax rates. If you exceed the caps the tax penalties are harsh.
Before you sit down with your employer to negotiate a Salary Sacrifice agreement it would be wise to seek financial advice and consider the following:
· Think about the wording of the agreement
· Make payment frequency a term of the agreement if possible
· Negotiate for no reduction in your SG amount
· Determine how bonuses will be treated