Time to read : 3 Minutes
Salary Sacrifice Sounds Bad But It S Really Not
It might have a name that makes you want to run in the opposite direction, but salary sacrifice isn’t as bad as it sounds. In fact, it’s a great strategy that many Aussies use to package their salary, pay less tax at EOFY and get a range of other benefits.
👋 I’ve even done salary sacrifice myself! 💰 My retirement fund enjoyed a healthy bump, so even though I was technically receiving less of my income at that time, I was making an investment into my future – and it’s going to pay off when I finally pack up my work laptop one last time!
4 million Australians don’t have any savings to fall back on.
Salary sacrificing into your super is an investment in your future – less now for much more tomorrow.
Alternatively, you can salary sacrifice in exchange for goods and services, like a car!
The tax benefits of salary sacrifice are a big drawcard for many Aussies.
What even is salary sacrifice?
The alarm bells are already ringing for countless Australians, with the cost of living only getting higher and mortgages getting more expensive every month. Add to those problems the latest data that shows almost one in three of us are only saving $50 a month, and an eye-watering 4 million Aussies don’t have any savings at all. Could salary sacrifice be the solution?
🤝🏽 Salary sacrifice is simply an arrangement between you and your employer, where you give up part of your wages in exchange for benefits of a similar value.
🚗 Benefits vary, but you could get a car or laptop, or do what I did and get your employer to make additional voluntary contributions into your super.
💲If you don’t do salary sacrifice, you’ll pay income tax on your whole salary and any of the benefits above you’ll have to pay for out of your own after-tax money.
Be aware of tax rates: If you plan on following my lead and salary sacrifice into your super account, be aware that the lower tax rate of 15% applies so long as your salary package is below $250,000. Otherwise it jumps up to 30% tax.
What you’ll get out of a salary sacrifice arrangement
On the surface it might be worrying to take a ‘pay cut’ of sorts, especially in the current climate where everything seems to be getting more expensive!
But remember that you aren’t actually getting paid less – you are just swapping some of your paycheque for another benefit. Here are some of the pros and cons of salary sacrifice to consider:
PRO: Like me, you can super-charge your retirement fund by sending that sacrificed portion of your salary straight into your super. Or you can get a work car, laptop or other goods and services in exchange.
CON: If you are already struggling with the cost of living, salary sacrifice might make your short-term outlook even tougher.
PRO: The tax benefits are a big drawcard. The tax savings you make can result in thousands of dollars difference – which will be even sweeter when you finally crack into your super account at retirement.
CON: Any money you sacrifice into your super won’t be accessible until you retire. Remember, your super isn’t an everyday savings account!
The bottom line: Visualise how much you can save through salary sacrifice
The problem many people have with salary sacrifice – at least with putting your money straight into super – is that you can’t really see the benefits. Compared to getting a car or computer in exchange, it’s tough to visualise how salary sacrifice is actually benefiting you. But let’s break down the calculations for someone who makes $100,000 a year:
If you salary sacrifice 15% of your income, you’ll send $15,000 to super for a taxable income of $85,000.
Income tax on your salary is $18,092 compared to $24,717 if you hadn’t salary sacrificed.
You’ll pay $2,250 tax on your super contributions, but the total tax you pay will be over $4,300 less than if you hadn’t salary sacrificed.
💪Think about how much $4,000 every year could add to your retirement fund. And then think about the power of compound interest!
Times are tough – but our grandparents and great-grandparents survived multiple wars, the Depression and their own market crashes. We can get through this as well! Making do with less can result in huge benefits down the track – so take a moment to think about whether salary sacrifice could be a smart strategy for you.
Read more:
How much of your income should you really be saving?
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