You may have heard the term ‘salary sacrifice’ around the office. Perhaps you didn’t bother looking into it, because let’s be honest, who wants to sacrifice even more of their salary? But did you know that it can actually reduce the amount of tax you pay? Yes, you heard right. Less tax to the government, and more money to you—or your super fund, anyway.
Let’s start by defining basic terms. Gross earnings is your pay before the tax is taken out. A marginal tax rate is the percentage of tax you pay depending on your gross earnings. In Australia, this starts at 19% for every dollar over $18,200, and goes up to about 30% on your first $180,000 and 45% for every dollar after that—and don’t forget the levies, which add an additional 4%! Ouch.
Now here’s where salary sacrifice comes in. This is when you take money from your gross earnings and put it into your super fund. Why? Because unlike your salary, all contributions to your super fund are only taxed at 15%. That’s a huge difference if your marginal tax rate is closer to the 45% end of the scale!
For those who are planning ahead for retirement, research has found that a couple in Australia wanting a comfortable retirement will need approximately $58,444 a year. Even assuming both retire at age 65 and get the age pension, that’s still roughly $510,000 you need in your super fund.
By starting early and getting more money into your super fund now, it will mean a larger difference. By sacrificing as little as $20—one meal out!—a week, you could have an extra $184,205 in your super fund if you start at age 25. Or for those of us a little older, $93,484 extra if you start at age 35. The ideal contribution amount for each person varies wildly depending on circumstances—it’s best that you talk to a financial adviser or financial planner so that you can get advice for your particular situation.
What does salary sacrificing mean for your take-home pay? How much is your pay actually reduced by? For someone earning $60,000 a year, without contributions they would take home about $920 each week. But here’s the thing—sacrificing $20 a week does not mean your take-home pay goes down by $20. Because your gross pay is now decreased by $1,040 a year, you are taxed on the decreased amount. This means that each week, your pay only goes down by $13 for that $20 sacrifice. (Do note, after the 15% super tax, only $17 goes into your super fund—but you still end up ahead!)
For those interested, you can see the full details of the calculations and assumptions below, kindly provided by Suncorp Super.
Before you get carried away by the benefits, however, keep in mind that you can only sacrifice up to $30,000 a year—or $35,000 if you’re over 49 years old. That includes the mandatory 9.5% that your employer contributes.
As salary sacrifice can be a somewhat complex topic, Suncorp has created a fun online game called Super Slinger that you can play to get a better understanding of how salary sacrificing works—and how it can work for you. (Added bonus: It doesn’t keep asking you to buy additional in-game items!) Leaders in Heels had a chance to play with it, and not only was it rather addictive, it was also helpful in learning about salary sacrificing. Sounds like an odd combo, right?
The game itself is simple to play, where you have a number of projectiles that you need to fling at a structure to topple the prize nested above or within. The theme itself is cute, related to the idea of salary sacrificing. Your projectiles are coins—your money—and you’re flinging them into the future to secure items like hoverboards and time machines. At the end of each successful level, you’re not only rewarded with your prize, but with an interesting fact about salary sacrificing.
Of course, it never hurts to hear from experts in the field, either. Below, Suncorp Super answers some common questions:
1. How can someone get a rough estimate of the amount they need to retire, as different people have different views of ‘comfortable’?
Take a look at our Retirement Simulator. All you need to know if you current super balance and how much you earn!
2. How does my super fund earn money?
Earnings will depend on your investment choices. Even with the cyclical nature of markets, in general, topping up your super on a regular basis means you should have more in retirement. Your investment returns will compound as you contribute more.
3. What are your top tips in regards to salary sacrificing for anyone, regardless of age?
- Start early
- No amount is too small
- Don’t exceed your contribution limit. There’s a limit to the amount you can contribute to your super each year, before and after tax, depending on your age without incurring additional tax.
- Check if it’s the best strategy for you. For those earning under $50,454, an after tax contribution may be more effective as you may be eligible to receive a government co-contribution.