Is it worth salary sacrificing into super if you are not on a high income?

MARIA BEKIARIS
Many people think you have to be on a high income to benefit from salary sacrificing into super but is that the case? We look at the numbers.

How does salary sacrificing into super work?

Salary sacrificing essentially means asking your employer to pay part of your before-tax salary into your super rather than having the money paid into your bank account. It does mean your take-home pay will be lower but the advantage of this approach is that pre-tax contributions into super are taxed at just 15%. That’s because it is considered a concessional contribution.

If you had taken the money as cash you would have been taxed at your marginal tax rate, which for most people would be more than 15%.

Adding money into your super can also boost your retirement nest egg substantially. For example, a 20-year-old who salary sacrificed $25 a week into super could possibly boost their super balance by $78,023. “The sooner you start considering these types of strategies the more impact this is going to have on your longer term goals,” said financial adviser Glen Hare from Fox & Hare.

It’s important to remember though that there are limits on how much you can contribute to super. The cap on concessional contributions, which includes salary sacrifice contributions, is $27,500. It’s worth noting that your employer’s contributions count towards that amount.

Is salary sacrificing into super worth it if you are not on a high income?

You might think it’s not worth salary sacrificing into super if you aren’t on a high income but that’s not necessarily the case. Etax crunched the numbers to demonstrate the potential tax savings of salary sacrificing $25 a week on various salaries.

As you can see from the table below, if you earn less than $18,000 you won’t save any tax by salary sacrificing but there are tax benefits for all the other salaries considered.

In our hypothetical example, someone earning $60,000 a year who salary sacrifices $25 a week into super will save $273 in tax over the year after taking into account the 15% tax paid on the super contribution when it is deposited into their super fund. Surprisingly, this is slightly more than someone on $80,000 a year. At $45.50 a year the tax savings are significantly lower for someone earning $40,000 but it’s still something.

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Salary sacrificing $25 a week on various salaries

Without salary sacrifice
Gross salary $18,000 $40,000 $60,000 $80,000 $150,000*
Tax payable
(Inc low inc offset & medicare levy)
$0 $3,887 $9,987 $16,987 $43,567
Salary after tax $18,000 $36,113 $50,013 $63,013 $106,433
Low Income Super Tax Offset** $270 $0 $0 $0 $0
With salary sacrifice
Salary sacrificed super $1,300 $1,300 $1,300 $1,300 $1,300
Salary after salary sacrifice $16,700 $38,700 $58,700 $78,700 $148,700
Tax $0 $3,647 $9,519 $16,539 $43,060
Salary after tax $16,700 $35,054 $49,181 $62,162 $105,640
Tax saved from salary sacrifice $0 $241 $468 $449 $507
Low Income Super Tax Offset** $465 $0 $0 $0 $0
Tax paid on super contribution
when deposited into fund
$195 $195 $195 $195 $195
Net saving $270.00 $45.50 $273.00 $253.50 $312.00

Source: Etax.* With private hospital cover. **Note this is only available to people earning under $37,000 and is paid irrespective of salary sacrificing. It is paid into your super fund, not your bank.

 

Woman doing calculations
Image source: Syda Productions/Shutterstock.com

If you are on a lower income should you consider making an after-tax contribution to get the government co-contribution rather than salary sacrificing?

If you are on a lower income you may consider making an after-tax contribution instead of salary sacrificing into super. That’s because if you earn less than $56,112 and make an after-tax contribution to your super you may be eligible for a government top-up. To get the maximum super co-contribution of $500 you need to earn less than $41,112 and make an after-tax contribution of $1,000. If you earn more than $41,112, the co-contribution amount reduces progressively as your income rises.

Canstar asked Etax to compare the two options at various salary levels and, as the table shows, it comes down to how much you earn. For example, someone earning $35,000 would be about $200 better off by making an after-tax contribution and getting a government top-up rather than salary sacrificing.

“For people earning up to $46,000 there’s generally a higher net saving by making a voluntary post-tax super contribution than there is by salary sacrificing,” said Senior Tax Manager at Etax, Liz Russell. The exception is on the $25,000 salary although in that case the savings are fairly similar.

“Once your income is above $37,000, you’re no longer entitled to the low-income super tax offset and from $41,112 the super co-contribution starts to reduce as well. The reduction/removal of both of those government benefits means the tipping point where your ‘net saving’ is higher from salary sacrificing is $46,000,” explained Ms Russell. “Note these figures only apply for someone contributing $25 a week. If that amount increased or decreased, the tipping point may change so it’s always best to chat with your accountant or financial planner if you’re not sure.”

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Salary sacrifice v super co-contribution

With salary sacrifice of $25 per week
Gross salary $18,000 $25,000 $35,000 $45,000 $46,000 $50,000 $55,000
Salary sacrificed super $1,300 $1,300 $1,300 $1,300 $1,300 $1,300 $1,300
Salary after salary sacrifice $16,700 $23,700 $33,700 $43,700 $44,700 $48,700 $53,700
Tax Payable
(Inc low inc offset
& medicare levy)
$0 $137 $2,664 $4,572 $4,757 $5,919 $7,719
Salary after tax $16,700 $23,563 $31,036 $39,129 $39,944 $42,781 $45,981
Tax saved from salary sacrifice $0 $377 $273 $241 $341 $468 $468
Low Income Super Tax Offset $465 $500 $500 $0 $0 $0 $0
Tax paid on super contribution
when deposited into fund
$195 $195 $195 $195 $195 $195 $195
Net saving $270.00 $682.00 $578.00 $45.50 $145.50 $273.00 $273.00
With Super Co Contribution of $25 per week
Gross salary $18,000 $25,000 $35,000 $45,000 $46,000 $50,000 $55,000
Tax Payable
(Inc low inc offset
& medicare levy)
$0 $514 $2,937 $4,812 $5,097 $6,387 $8,187
Salary after tax $18,000 $24,486 $32,063 $40,188 $40,903 $43,613 $46,813
Voluntary Post Tax
Contributions $25p week
$1,300 $1,300 $1,300 $1,300 $1,300 $1,300 $1,300
Low Income Super Tax Offset $270 $367 $481 $0 $0 $0 $0
Superannuation Co-contribution $500 $500 $500 $370 $337 $204 $37
Tax paid on super contribution
when deposited into fund
$195 $195 $195 $195 $195 $195 $195
Net Saving $575.00 $672.28 $785.95 $175.00 $142.00 $9.00 -$158.00

Source: Etax.*Note this is only available to people earning under $37,000 and is paid irrespective of salary sacrificing. It is paid into your super fund, not your bank.

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What to consider

If you are thinking about salary sacrificing into super it’s not only the numbers that matter. There are a number of other issues to consider when deciding whether it’s the right approach for you.

“The main thing to consider is your cash flow position. Salary sacrificing means you’re reducing the amount of take-home pay you receive from your employer each week. Can you afford to forgo this cash each week?” said Ms Russell.

This is a point echoed by Mr Hare who said it’s important to have an understanding of your cash flow and what money you need to cover your current expenses. “Make sure you can meet your current day-to-day financial needs,” he added.

Something else to think about is if you may want access to that money. “Salary sacrifice is a tax-effective way to invest but the downside is you won’t be able to access it until your twilight years,” pointed out Mr Hare.

“Salary sacrificing means forgoing the money now to add a bit extra into your retirement fund. While the maths suggests you do save on ‘tax’ by salary sacrificing, unless you’re nearing retirement age, you don’t see the pay-off for years or even decades. I think it’s a personal choice for low-income earners as some will be in a position where they can sacrifice $25 per week, while others can’t,” said Ms Russell. “Before making these sorts of decisions, it’s always a good idea to speak to a financial planner as what works for one person might not work for the next.”

It’s also important to look at the big picture. What else would you like to achieve? For example, do you have a big mortgage you want to try to pay off faster? “Salary sacrificing needs to be considered in conjunction with your broader strategy,” said Mr Hare, adding that for many people it may also be important to build wealth outside of super as well.

Mr Hare also suggested that if “you are making the effort to make extra contributions into super, you should make sure the super fund you are putting additional funds into is working as hard as possible for you. What are the companies it is investing in, what is the performance of the super fund and also what fees are you actually being charged by your super fund?”

Cover image source: Ollyy /Shutterstock.com


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