As a tax-effective way of saving for retirement, salary sacrificing into super is a bit of no brainer, after all, if you don’t need a major chunk of your take-home salary any time soon, why pay the marginal tax rate (typically 30%) on it when you can park it in super and pay only half that amount?
Admittedly, not everyone has surplus money left over after payday, and even those who do may not wish to commit to locking it away inside their super where they won’t have access to it until they retire.
However, if you are in a position to salary sacrifice into super, you still need to know how it works and how to reap the benefits without any downsides.
While salary-sacrificing super is usually more effective for people on middle to higher incomes, ASIC’s Moneysmart site points out that salary-sacrificing super can be tax-effective if you earn more than $37,000 per year.
The workings
Here’s any example of exactly how salary sacrificing into super actually works.
Firstly, the amount being salary sacrificed is not assessed for personal income tax purposes.
This means if you’re an employee earning $80,000 annually and choose to salary sacrifice $15,000, only $65,000 of your annual salary is taxable (at your marginal tax rate).
So instead of your employer deducting around $17,000 tax throughout the year, you will only be taxed around $12,000, leaving you with $53,000 to be paid into your bank account.
This means you’ll reduce your personal income tax by around $5,000 annually.
However, don’t forget that all salary sacrifice contributions incur a contributions tax of 15%, meaning that your salary sacrifice amount of $15,000 will be reduced by $2,250 in contributions tax and the remaining $12,750 will be added to your super balance.
So even after contributions tax there is still an overall tax saving of $2,750.
Salary sacrificing into super is also the perfect environment to utilise the principal of compound interest which Albert Einstein called the 8th modern wonder of the world.
Numbers crunched by Oxlade Financial show what the value of $100 today will become at age 60, based on your current age and income (assuming an 8% return).
As a case in point, $100 invested into super today by a 30 year old with an income between $45,000 and $120,000 is expected to be worth $988 when that person is 60.
How much can you salary sacrifice into super?
There is a maximum amount you can salary sacrifice based on the concessional contribution cap which is $27,500 ($30,000 for the 2024-25 financial year) per financial year.
But remember, you also need to take into account the concessional contribution being paid to you by your employer as compulsory super.
In other words, based on a rate of 12% (2025/26 and onwards) an employee earning $80,000 annually will receive $9,600 in compulsory super paid by their employer annually.
Take away that $9,600 from the concessional contribution cap which was $27,500 and that employee is left with a potential [annual] salary sacrifice amount of $17,900.
Subject to your employers approval, you could potentially spread this salary sacrifice evenly over a financial year or make a few top-up payments in the last few months of the tax year.
However, it’s also important to remember that you may be able to utilise unused portions of your concessional contribution cap from previous years if your super balance was below $500,000 on 30th June of the previous financial year.
It’s also important to remember that if you ever exceed the concessional contribution cap in any year, the ATO won’t penalise you per se, you’ll just end up paying the excess at your marginal tax rate.
Limited uptake
While only around 10-15% of working Australians opt for salary sacrifice [to super], this may be because they either never knew it existed or simply didn’t understand the benefits of doing so.
While medium-to-large businesses are more likely to allow their employees to salary sacrifice [into super], many SMEs may have simply never been asked by their employees to participate.
So if you’re unsure if your SME employer will allow you to salary sacrifice - simply ask.
Remember, salary sacrificing doesn’t offset an employer’s compulsory super obligations, which once ‘payday super’ laws come into effect means pay and super will end up being paid simultaneously.
While super deposits into your super fund – be it compulsory super or salary sacrificing – may take a few days to hit your account, an itemised payslip [every payday] should give you the peace of mind that all necessary payments have been made.
Other forms of salary sacrificing
According to the ATO, other benefits you can salary sacrifice include making voluntary contributions towards your HECS debt through salary sacrificing, meaning you can repay the debt without paying tax on it as earnings.
You could even salary sacrifice private health insurance premiums if you work in the hospital system, a charity or not-for-profit organisation or private school and your employer offers this as part of your workplace benefits program.
Beyond super, one of the other popular ways to salary sacrifice is into a car via what’s known as novated lease.
According to Leaselab co-founder Alex Davis, novated leases help change car ownership from a liability to something that can actually benefit drivers financially.
To put that into context, if a person in the current tax year earns $120,000, they would pay around $31,867 in tax, leaving them with $88,133 in their pocket.
However, if they leased say a new Tesla Model 3 retailing for $67,400 through a novated lease, they could instantly remove GST payable on the vehicle, notes Davis and reduce their personal income tax bill to potentially create over $9,000 in savings annually.
“Their total tax savings could be more than $45,000 over the course of a five-year lease,” he says.
Greater savings are available on electric vehicles under the luxury car threshold of $89,332 in 2023/24 because they are exempt from the 47% Fringe Benefits Tax.
What this means, adds Davis is that the entire lease and running costs can be deducted from a person’s pre-tax salary.
“Price has historically been a barrier for many people to get into an electric vehicle, so it’s not surprising that so many have turned to novated leases to make EV ownership more attainable,” Davis says.
You can also salary sacrifice to cover:
- School fees and childcare costs
- Living expenses and relocation costs
- Professional memberships
- Tools of the trade and work equipment
- Portable electronic devices
- Loan repayments
- Education debt
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
