Salary sacrificing is a strategy that can offer significant benefits for individuals looking to manage their tax obligations and grow their retirement savings.
While the concept may sound a little complex, it’s actually a straightforward way to maximise one’s income.
Let’s take a closer look at how salary sacrificing works.
What is Salary Sacrificing?
Salary sacrificing, or salary packaging, is an arrangement between an employee and their employer. An employee agrees to “sacrifice” part of their salary before tax in exchange for benefits like additional superannuation contributions. This helps reduce taxable income, which can mean paying less tax overall.
The Key Benefits of Salary Sacrificing
- Tax Efficiency
A major advantage of salary sacrificing is the potential tax savings. When salary is sacrificed into superannuation, it’s taxed at just 15%, which is lower than the marginal tax rate most people pay on their income. For those earning a higher income, this can translate into significant tax savings. - Boosting Retirement Savings
In addition to the tax benefits, salary sacrificing into superannuation helps boost retirement savings. Many Australians worry they won’t have enough saved for retirement, and salary sacrificing provides a way to enhance the amount going into super without needing to think about it each month. Over the years, with the power of compound interest, this can make a noticeable difference. - Flexible Options
While salary sacrificing is most commonly used for superannuation contributions, some employers also allow other benefits to be included, such as laptops, cars, or even rental or mortgage payments. This flexibility allows employees to use their pre-tax income to cover costs that they might otherwise have to pay for out of their after-tax salary.
Important Considerations
Although salary sacrificing offers clear benefits, it’s essential to consider the ATO’s contribution caps.
For the 2024-2025 financial year, concessional contributions (which include salary sacrificed amounts) are capped at $30,000. Exceeding this limit could result in additional taxes, so careful planning is crucial.
Another thing to consider is that salary sacrificing is generally more beneficial for those on higher incomes.
The tax savings may not be as pronounced for lower-income individuals, so it’s important to weigh whether this strategy is suitable for their situation.
Is Salary Sacrificing the Right Option?
Salary sacrificing can be a great way to improve tax efficiency and secure a more comfortable retirement, but it isn’t a one-size-fits-all solution.
Everyone’s financial situation is different, and getting personalised advice can ensure the strategy aligns with an individual’s goals.
For those interested in learning more or exploring whether salary sacrificing is suitable, contacting a financial advisor or accountant can provide the necessary guidance.