SALARY SACRIFICE TO SAVE FOR RETIREMENT AND REDUCE YOUR TAX BILL

What is it?

Salary sacrifice is an arrangement with your employer where you forgo part or all of your pre-tax salary into your super

How can you benefit?

  • Boost your retirement savings.
  • Reduce your income tax.
  • Access the tax concessional environment of super

Whether this strategy works for you will depend on your personal circumstances and your level of income.

Who can this strategy work for?

Salary sacrifice can work effectively if you:

  •  want to grow your retirement savings sooner
  •  are under 75 years of age*
  •  are eligible to contribute
  •  have a marginal tax rate above 15%
  •  can salary sacrifice income without it having a major impact in your lifestyle
  • have an employer willing to establish a salary sacrifice agreement.

Example: Meet Caroline

  • 40 years of age, earns $70,000 pa and wants to start saving for a comfortable retirement.
  • Salary sacrifice vs. investing after-tax money
  • In this example Caroline can accumulate savings faster
  • Caroline’s adviser decides to compare salary sacrificing with investing after-tax money.
  • Caroline has $,5000 gross salary pa to invest.
  • If Caroline takes the $5,000 as cash, she will pay 31.5% tax and be left with $3,425.
  • However, if she salary sacrifices, the super contributions will only incur 15% tax and she will be left with $4,250 which remains in the fund.

Remember that investment earning within super are taxed at 15% instead of at Caroline’s marginal tax rate of 31.5%, so investing her money inside super means Caroline can accumulate her retirement savings faster.

Salary sacrifice – things to remember

Salary sacrifice to super contributions count as income for the following measures:

  • Centrelink income-tested payments under Aged Pension age
  • Government co-contribution
  • Selected tax offsets
  • Baby bonus
  • Family tax benefit (FTB) Part A & B
  • Personal deductible contributions to super
  • Medicare levy surcharge liability.

For any questions about salary sacrifice and its suitability for you please contact me.

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