"Salary sacrificing" is the sort of term that gets bandied around on a regular basis, but not many people can actually explain how it works or how it might be useful to their situation. This week we plan on doing just that.
In essence, salary sacrificing is an arrangement between you and your employer where a portion of your pre-tax salary is used to provide benefits of a similar value. This may include things like cars, computers, school fees and super contributions. Our favorite form of salary sacrificing is the type that sends money towards superannuation, and this is where you and your employer agree to pay a portion of your pre-tax salary as an additional concessional contribution to your superannuation account. This is typically a tax-effective strategy if you earn more than $37,000 a year.
So how does it work? If you decide to salary sacrifice into super you will need to ask your employer to redirect a portion of your pre-tax pay to your super fund. Like your employer superannuation guarantee (SG) contributions, salary sacrificed contributions are taxed at a rate of 15% when they are received by the fund. For most people, this will be much lower than their marginal tax rate which is why these contributions are known as "concessional contributions."
Let's have a closer look at some numbers to help illustrate this for an employee with a $90,000 salary. Let's assume this person decides to direct $10,000 of their pay into superannuation, and in doing so they will save $3,450 in tax, with the extra money going into their super fund:
From this example, we can see this person's take-home pay will drop by $6,550, they will save $1,950 in tax on income and super and they will have an extra $8,500 in their super.
If you think this type of strategy might apply to you or if you'd like further ideas on this, please don't hesitate to contact us. We're only a phone call or email away.
***Information sourced from the ASIC MoneySmart Website for more information visit www.moneysmart.gov.au