Salary sacrificing made simple

Salary sacrificing can be an effective way of increasing your super balance and saving for retirement while also delivering significant tax advantages.

Salary sacrificing is a popular arrangement with employers, whereby you can opt to receive less take-home pay in return for a range of potential financial benefits.

Also commonly referred to as salary packaging, one choice is to ask your employer to add some of your wages directly into your super. The amount you choose to be added to your super comes out of your salary before you’re paid, reducing your taxable income and providing an immediate tax benefit.

Any salary sacrificing you request your employer make on your behalf is on top of their compulsory super contribution.

Although many people opt to enter into a salary sacrifice arrangement when completing the paperwork for a new job, you can opt-in to this arrangement at any point with your employer.

Investments held in super can receive significant tax advantages. So, depending on your current income, sacrificing some of your salary into superannuation now could be part of an effective long-term wealth and tax strategy.

In this article we explore:

How salary sacrificing works

Most, but not all, employers offer employees the opportunity to enter into a salary sacrificing arrangement. To find out if your employer offers this, we recommend checking with your HR or payroll department.

If they do offer it, let them know in either a dollar amount or percentage figure, how much of your pre-tax pay you’d like to put into your super account each pay cycle.

Salary sacrificing delivers a number of benefits, including:

  • Paying less tax:
    When you salary sacrifice into your super, it’s taxed at a rate of 15%, or 30% if you earn $250,000 a year or more, while your income can be taxed anywhere up to 47%.

  • Reducing your taxable income:
    In addition to paying a lower rate of tax on your salary sacrificed amounts, the more pre-tax salary you choose to put into your super, the lower your taxable income will be.

  • Super Growth:
    Any additional contributions into your superannuation account can help you grow long-term wealth by maximising the amount of compound interest you earn over your career.

There are some possible disadvantages with salary sacrificing, including:

  • Reduced spending power:
    You should make sure you have enough money in your take-home pay to meet your financial commitments to avoid leaving yourself short.

  • Tax-rate minimums:
    If you’re on a low income, your additional contributions to super could be taxed at a higher rate than your salary.

  • Locked-up finances:
    In most cases, you will not be able to access super funds prior to retirement.

The beauty of salary sacrificing into super is that your contributions are invested automatically and, by paying less tax, you know that your money is working harder for your future.

Other considerations

How much you choose to salary sacrifice into super will depend on your personal situation and how much you can afford. You should also consider other concessional contributions you already make into your super (such as how much your employer contributes) as there is currently a $27,500 cap per year on the amount of concessional contributions you can make into your super.

If you go over this cap, you will be taxed at your marginal rate.  For further information on the contribution caps, please see our contributions page.

It’s also important to remember that you’re not locked into a salary sacrificing arrangement and can stop, decrease or increase your contributions at any time.

Before salary sacrificing into super, you may want to seek financial advice.

Salary sacrifice today

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Read next:

Understanding superannuation contributions and taxes

By adding a little bit extra to your super, you could enjoy more retirement savings and several tax benefits.

Unpacking super contribution caps

Although we recommend adding extra money to your super, there are rules around how much you can add, these are known as ‘contribution caps’.

The ins and outs of additional personal super contributions

Your super is a long-term investment – additional contributions you make today can have a significant impact on your balance and retirement outcomes.

Disclaimer: This content has been prepared on behalf of Mercer Superannuation (Australia) Limited ABN 79 004 717 533, Australian Financial Services Licence #235906, the trustee of the Mercer Super Trust (‘Mercer Super’) ABN 19 905 422 981. Any advice is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information, you need to take into account your own financial circumstances. The material contained in this document is based on information received in good faith from sources within the market and on our understanding of legislation and government press releases at the date of publication which we believe to be reliable and accurate. Neither Mercer nor any of its related parties accepts any responsibility for any inaccuracy. Please consider the Product Disclosure Statement, Product Guide, Insurance Guide, and Financial Services Guide before making a decision about the product, or seek professional advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. Past performance is not a reliable indicator of future performance. 'MERCER' is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.