Lets talk about something a little different today. Salary packaging, also known as salary sacrifice.
Salary sacrifice is an arrangement between you and your employer where you pay for some items or services straight from your pre-tax salary. This can reduce your taxable income and put more money in your pocket.
This will be a short series so keep an eye out for the following related posts.
First, lets look at probably the most well know salary sacrifice option, salary sacrificing to your super. Salary sacrificing into your super is an arrangement between yourself and your employer to voluntary ‘sacrifice’ part of your wage into your superannuation, on top of your already compulsory contributions.
Like most things,however, there are sometimes limitations to how much you can sacrifice to your super. If there are limitations to how much you are able to contribute, these will be outlined in your terms of employment. As well as these, it is also useful to consider taxes.
Lets get a bit technical for a minute. Firstly, the concessional contributions cap is the amount you can sacrifice into your super and still receive the lower tax rate of 15%. This amount is currently $25,000.
The second tax to keep in mind is what’s called the Division 293 tax – this comes in to play when you have an income and concessional super contributions of more than $250,000 in one year, as from 1 July 2017.
So, how can this be beneficial?
OK, so does salary sacrifice really make a difference? Is it really worth it? Lets have a closer look.
Lets take for example Susie. Susie has just turned 30 and has started to think seriously about her retirement. Susie is earning a salary of $80,000 per year after tax and her employer is contributing 9.5% to her super. Susie has decided to salary sacrifice $200 of her fortnightly pay to her super. $200 a fortnight doest sound like a great deal doesn’t sound like a lot and but it quickly adds up.
Because Susie is contributing extra to her super, this brings her taxable income down from $80,000 to $74,800 ( total pay minus salary sacrifice) saving Susie money on her tax. What’s more, that extra $200 will make a difference in the long run. If Susie plans to retire at the average age of 65 and sticks with her current contribution of 9.5%, when she retires she will have roughly $403,000 in her super. But if she salary sacrifices $200 a fortnight, when she retires, she will have closer to $592,000.
So, the verdict? I personally recommend salary sacrificing into your super as soon as you can comfortably afford it. Even a little such as $10 a week can make a big impact as the short term loss far out ways the long term gains.
Design your own future