Salary Sacrifice Revealed
Salary sacrificing money to superannuation remains one of the most effective ways to assist in reducing your tax and save for retirement.
It may not be suitable for everyone, but for many people it can help them increase their retirement nest egg.
What is Salary Sacrifice? Salary sacrifice is a strategy that allows you to divert some pre-tax salary to a superannuation fund with the aim of saving tax.
You receive a lower amount of post-tax income as a result.
What's the advantage? The money that is contributed to superannuation is taxed at 15%.
So, for every $1,000 that is salary sacrificed to super, $150 is deducted, leaving $850 to be invested.
If you earn over $35,000 per year, you're likely to be on a marginal tax rate of 30% or higher (plus 1.
5% Medicare levy).
Let's say you earn $60,000 pa and are on the 30% tax rate.
$1,000 of income has $300 tax deducted and $15 Medicare levy deducted (assuming the usual Medicare levy applies).
This leaves you with $685 to invest after tax.
So, one advantage of salary sacrificing is that you have more money to invest than if you elected to receive the same portion of income as salary and paid tax at your (higher) marginal rate of tax.
Salary Sacrifice - Things to Consider Of course, there are advantages and disadvantages to salary sacrificing.
The obvious advantage is that the 15% contribution tax is lower than your marginal rate of tax if you earn more than $35,000 pa (based on 2009/10 tax rates).
A disadvantage of salary sacrificing is that your funds are preserved in your superannuation fund until you satisfy a condition of release - usually reaching a certain age or retiring.
For someone close to retirement, this may not affect their decision to salary sacrifice.
Someone in their 30's, however, may prefer to contribute less to superannuation via a salary sacrifice arrangement, and instead accumulate funds outside of super where the investments remain accessible.
This is a trade-off between saving tax and retaining access to capital.
Watch Your Contribution Caps Another important thing to consider when salary sacrificing is to make sure you don't exceed your contribution caps.
There's a maximum amount you can contribute to super each year (based on your age).
Contributions over these limits can result in extra tax being payable, therefore diminishing the effectiveness of salary sacrificing.
Contributions your employer makes are also included in these caps, so you need to take this into consideration when determining how much to salary sacrifice.
Salary Sacrifice - Summary Salary sacrifice can be a tax-effective way of contributing money to superannuation to fund your future retirement.
But it is important to set it up correctly.
It may not be suitable for everyone, but for many people it can help them increase their retirement nest egg.
What is Salary Sacrifice? Salary sacrifice is a strategy that allows you to divert some pre-tax salary to a superannuation fund with the aim of saving tax.
You receive a lower amount of post-tax income as a result.
What's the advantage? The money that is contributed to superannuation is taxed at 15%.
So, for every $1,000 that is salary sacrificed to super, $150 is deducted, leaving $850 to be invested.
If you earn over $35,000 per year, you're likely to be on a marginal tax rate of 30% or higher (plus 1.
5% Medicare levy).
Let's say you earn $60,000 pa and are on the 30% tax rate.
$1,000 of income has $300 tax deducted and $15 Medicare levy deducted (assuming the usual Medicare levy applies).
This leaves you with $685 to invest after tax.
So, one advantage of salary sacrificing is that you have more money to invest than if you elected to receive the same portion of income as salary and paid tax at your (higher) marginal rate of tax.
Salary Sacrifice - Things to Consider Of course, there are advantages and disadvantages to salary sacrificing.
The obvious advantage is that the 15% contribution tax is lower than your marginal rate of tax if you earn more than $35,000 pa (based on 2009/10 tax rates).
A disadvantage of salary sacrificing is that your funds are preserved in your superannuation fund until you satisfy a condition of release - usually reaching a certain age or retiring.
For someone close to retirement, this may not affect their decision to salary sacrifice.
Someone in their 30's, however, may prefer to contribute less to superannuation via a salary sacrifice arrangement, and instead accumulate funds outside of super where the investments remain accessible.
This is a trade-off between saving tax and retaining access to capital.
Watch Your Contribution Caps Another important thing to consider when salary sacrificing is to make sure you don't exceed your contribution caps.
There's a maximum amount you can contribute to super each year (based on your age).
Contributions over these limits can result in extra tax being payable, therefore diminishing the effectiveness of salary sacrificing.
Contributions your employer makes are also included in these caps, so you need to take this into consideration when determining how much to salary sacrifice.
Salary Sacrifice - Summary Salary sacrifice can be a tax-effective way of contributing money to superannuation to fund your future retirement.
But it is important to set it up correctly.
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