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Salary sacrifice: Is it worth it?

Sacrificing a portion of your salary can help you boost your super and save you tax.

Are you looking for a way to boost your retirement savings? Redirecting a portion of your income into super can give you a boost, and reduce your tax bill at the same time.

What is salary sacrifice?

Salary sacrifice involves you giving up a portion of your pay and putting it into your superannuation instead. While giving up some of your take-home pay might be a challenge, there are two main benefits to doing this – it gives your retirement savings a boost, but also allows you to claim a reduced tax rate.

Salary sacrifice

If you earn over $37,000 per year you are able to contribute a portion of your pre-tax salary to your superannuation and get a concessional 15 per cent rate of tax.  If you took the money you are sacrificing as salary it would be taxed at your marginal tax rate, so this is a substantial tax saving.

Setting up your salary sacrifice

Every employer is different, so make sure that your workplace has a salary sacrifice option. If it does, ask your employer to redirect your pre-tax salary to your superannuation fund of choice.

You should enter into a formal agreement and include the details in your terms of employment. Make sure you get everything in writing. Doing this will ensure your employer continues to calculate the 9.5 per cent superannuation guarantee on your original salary, not your post-sacrifice salary.

How much to contribute

Keep in mind that there are limits on the amount of pre-contributions you can put into your super. This is known as the concessional contributions cap.

All individuals aged under 75 can contribute $25,000, including the 9.5 per cent super guarantee you get from your employer.

Transition to retirement strategy

If you are between 55 and 64 and still working, you can boost you super even more by combining a salary sacrifice strategy with a transition to retirement strategy (TRAP). This involves you sacrificing as much of your salary as you can afford and at the same time commencing a pension from you SMSF. This gives you financial advantages on multiple levels through:

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    boosting your super nest egg through salary sacrifice
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    paying less tax because you’re drawing a pension from your SMSF
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    improving cash flow for living expenses, which may have otherwise been limited by salary sacrifice alone.

And once you turn 60 years old, you will save even more money because pension payments from your SMSF to you are tax free.

Other tax-effective ways to boost your super

While salary sacrifice is one of the most advantageous and tax-effective retirement savings vehicles, it is not the only one. Consider the following options to further boost your super:

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    Salary packaging: Your employer is able to pay for some services or items such as computers, cars and childcare straight from your pre-tax salary. This reduces your taxable income.
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    Government co-contribution: If you make after-tax contributions to your super the government will match some or all of what you put in. How much the government gives you is dependent on how much you earn.
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    Spouse super contribution tax offset: This allows you to pay up to $3000 into your spouse’s superannuation fund and claim a tax offset of up to $540. To be eligible your partner cannot have earned more than $13,800 in the financial year.
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    Low income super tax offset contribution: If you earn less than $37,000 per year the government could make a contribution of up to $500 annually to your super. It is 15 per cent of the before-tax contributions you or your employer make to your super account during the financial year.

There are a number of ways you can make your take-home pay work harder and boost your superannuation at the same time. Entering into a salary sacrifice agreement with your employer is a great way you can do this.

If you want to learn more about SMSFs, download an information pack. If you’re ready to establish an SMSF, you can apply now with ESUPERFUND.

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