What You Need to Know About Salary Sacrifice

Written and accurate as at: 7 July 2015

Under superannuation law, your employer is required to pay the equivalent of at least 9.5% pa of your salary into your superannuation fund. 

You may also decide to contribute more of your salary to top up your superannuation balance and prepare for your retirement. You can choose to increase your contributions to super using your pre-tax income or post-tax income. In this article, we explore the option of using your pre-tax salary to boost your superannuation which is a common strategy also referred to as “salary sacrifice”. 

Salary sacrificing to super is a voluntary arrangement that you can enter into with your employer in which you decide to transfer some of your pre-tax salary to your superannuation fund. 

It works by arranging with your employer to pay an amount of your salary to your superannuation fund before tax. This means that your salary for tax purposes reduces and so may your take home pay or net income

Although you don’t pay income tax on the amount that you salary sacrifice, 15% contributions tax which will be deducted from the amount salary sacrificed when it is paid into your super fund. For those on higher incomes (if adjusted taxable income is greater than $300,000 per annum) this contributions tax increases to 30%. 

There are two main reasons why people salary sacrifice part of their salary to super. This first is that they might save tax, if their tax rate is higher than the contributions tax rate. The second is they wish to boost their savings for retirement in a tax effective environment. 

The salary sacrifice amounts that your employer puts into your superannuation on your behalf count towards your Concessional Contribution annual limit. Your Employer Superannuation Guarantee (SG) contributions of 9.5% also count towards this contribution limit which for the 2015/2016 year is $30,000 for anyone aged 48 years or younger on 30 June 2015 and $35,000 for anyone aged 49 years or older on that same date. 

For anyone considering entering into a salary sacrifice arrangement it is important to:

  • Note that salary sacrificing is a voluntary arrangement and not all employers will offer this benefit to their employees.
  • Enter into an arrangement for future salary only, not past earnings. If you plan to salary sacrifice a bonus payment then you will need to enter into an agreement with your employer before you become entitled to the bonus.
  • Get a written and signed agreement in place with your employer which confirms the terms of your arrangement.
  • Check whether your employer plans to pay the contributions to your super fund the same time as you receive your regular weekly, fortnightly or monthly pay. Some employers choose to pay your Superannuation Guarantee (SG) entitlements quarterly and may plan to delay your voluntary salary sacrifice contributions also.
  • Check to ensure that your regular SG entitlements will not reduce under the proposed salary sacrifice arrangement.
  • Make sure your salary sacrifice contributions, employer SG and any other additional employer contributions do not exceed your Concessional contributions cap, otherwise penalties may apply.
  • Check with your accountant or financial adviser about the tax and financial implications of entering into salary sacrifice arrangement.