Financial independence – most of us dream of achieving it, hopefully before we’re too old to enjoy it! One great way to boost your savings and give you more options when you retire from work is by using the tax advantages of contributing to super. 

Why it works

Salary sacrifice contributions to super are taken out of your pay before income tax is calculated. That means instead of being taxed at your normal income tax rate this part of your pay is taxed at just 15%, which is considerably lower than the average Australian’s marginal tax rate of 32.5%1. The difference between the 15% tax you pay on salary sacrifice contributions and your income tax rate can be saved into your super instead of being paid as tax.

How much can I contribute?

Salary sacrifice contributions are also called concessional contributions, which means they are taxed at a lower rate. The maximum concessional contributions you can make in the 2017-18 financial year is $25,000. Concessional contributions above $25,000 attract tax penalties, so it’s important to stay within the rules. Concessional contributions include compulsory and award contributions made by your employer as well as any salary sacrifice contributions you decide to make.

A simple way to understand this strategy is to see it in action.

Meet Richard

Richard is 42 years old and plans to stop working in 23 years. He earns $85,000 before tax and employer contributions and salary sacrifices $75 per week of his before tax salary to his super.

By salary sacrificing, Richard is able to:

  • Pay $1,346 less income tax
  • Only give up $2,555 of his take home pay
  • Boost his super by $3,315
  • Enjoy an extra $761 per year of salary and super combined
  • By the time he retires, Richard could save an extra $103,1002


Try our Contributions Calculator to see how regular weekly contributions could boost your super before retirement.

How to make salary sacrifice contributions

Setting up regular salary sacrifice contributions is easy. Simply speak to your payroll department or complete a Payroll Deduction form and give it to your employer.

 

 


 

1 Based on Average Weekly Ordinary Time Earnings (AWOTE) of $1,569.60 and excluding the 2% Medicare Levy.

2 Assumes 9.5% employer contributions, 2.5% salary increase per year, 2.5% inflation and 6% investment returns per year net after fees and taxes.