What is salary sacrifice?
Consider yourself financially savvy? Or are you open about numbers not being your strong suit? Either way, you’ve possibly heard of salary sacrifice. While the term seems to suggest losing out on part of your salary, employees who enter into a salary sacrifice arrangement with their employer could actually have a lot to gain.
4 minute read
Let’s take a closer look at what salary sacrifice is and how you may be able to use it to your benefit.
- Salary sacrifice is an arrangement between you and your employer where your employer deducts money from your before or pre-tax salary to use to fund a benefit such as a car, laptop or extra contributions to your super.
- Because of the concessional tax treatment for super contributions, salary sacrificing into super may be a way to boost your super balance and pay less tax.
- Super contributions you salary sacrifice count towards the concessional contributions cap, which is $27,500 and also includes the super contributions made into your account by your employer.
What is salary sacrifice?
Salary sacrifice is an arrangement between you and your employer where an agreed amount will be deducted from your pre-tax salary in return for certain benefits. If you opt to salary sacrifice into your super, these contributions are in addition to your employer’s compulsory Superannuation Guarantee contributions (which are currently 10% of your salary per year). It’s worth checking with your employer to see if they offer their employees the ability to salary sacrifice, as it’s not something that every employer offers.
What can I salary sacrifice?
You can use a salary sacrifice arrangement for a number of benefits. There are three main types of benefits provided in these arrangements:
- Fringe benefits, which includes cars, property and expense payments such as loan repayments, school fees and childcare costs.
- Exempt benefits, which includes work-related items such as laptops, phones, protective clothing, briefcase, computer software and tools of trade.
How much can I salary sacrifice?
While the amount has to be mutually agreed between you and your employer, technically there is no limit on the amount you are allowed to salary sacrifice.
However, the super contributions made as part of the salary sacrifice agreement must not exceed the annual cap for concessional contributions, also called before-tax super contributions, which is currently $27,500 and includes compulsory super contributions made by your employer.
Why should I salary sacrifice into super?
Super contributions are taxed at 15%. Because many people pay a higher personal income tax rate on their income, salary sacrificing into super may provide an effective way to grow your super balance, while also paying less tax.
For instance, you might be on a salary of $80,000 per year and decide to salary sacrifice $10,000 per year into your super account. This would then bring your taxable income down to $70,000. So more super and less tax! Whatever amount you choose to sacrifice into your super, your employer will still be required to pay at least the compulsory Super Guarantee (SG) contributions of 10% to your super.
What should I consider before committing to a salary sacrifice arrangement?
Of course, there are several things you should consider before entering into a salary sacrifice arrangement with your employer. The Australian Taxation Office (ATO) suggests you consider the following:
- Although you might pay less tax because your taxable income is lower, your after-tax income for that year will also be lower – because you’ve directed a big chunk into your super, which you’ll only be able to access in future.
- You need to weigh up your personal income tax rate against the super tax rate of 15% - if you’re a low income earner, you may not save that much tax so it may be better to just contribute to your super with an after-tax contribution. You may also benefit from the low-income super tax offset.
- If you arrange a salary sacrifice agreement with your employer, it’s worth double checking to make sure employer is still contributing the 10% SG.
- Make sure you monitor your overall contributions to super so that you can ensure you stay within the concessional cap. This cap is for both compulsory super contributions, and voluntary contributions, including salary sacrifice.
If you’re interested in finding out how salary sacrificing into super could affect your super balance, tax and take-home pay, try Sunsuper’s easy-to-use online contributions calculator.
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