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Salary sacrifice or after-tax contributions: which should you choose?
Your employer is required to pay into your superannuation account, and the amount they pay is worked out based on your salary. In addition to these contributions, you can add to your super with voluntary contributions. You can set up these voluntary super contributions in a salary sacrifice arrangement with your employer or on your own from your take-home or after-tax salary.
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This article is over two years old, last updated on September 9, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent superannuation articles.
Salary sacrifice vs after-tax super contributions
Salary sacrifice involves your employer paying a part of your salary before any taxes are taken out and putting it directly into your super account. As the term implies, this involves sacrificing part of your salary in exchange for the peace of mind of adding to your super and therefore preparing for your retirement. Not all employers offer an option to set up a salary sacrifice arrangement, so you’ll need to check whether this is possible with your employer. Setting up salary sacrifice into your super can be a tax-effective way of saving for your retirement.
You can also make voluntary contributions into your super from your after-tax salary. This is something you’ll need to set up for yourself rather than relying on your employer to organise. You’ll also not get any concessional tax rate on these contributions, unlike contributions made through salary sacrifice, which are often taxed at a concessional rate. Voluntary after-tax contributions are called non-concessional contributions.
The benefits of salary sacrifice vs after-tax super contributions
So if you are planning to grow your super with voluntary contributions, is it better to salary sacrifice or make after-tax payments? To help you make that decision, you’ll want to understand the benefits of both options.
Tax
There is a big difference in how each option is handled by the ATO and for taxes. The main advantage of salary sacrificing is reducing the tax you pay overall. Salary sacrifice contributions are classified as concessional contributions and are usually taxed at a concessional rate of 15 per cent. For most people, this is likely to be lower than the marginal tax rate or the rate you pay on your income. You don’t get these sorts of tax concessions when making after-tax voluntary contributions. This is because the money you’re using has already been taxed at the full rate.
If you're in an income bracket that attracts a tax rate lower than 15 per cent, you could actually save by making after-tax super contributions rather than using salary sacrifice.
Concessional contribution cap
Money put into your super is taxed at a concessional rate of 15 per cent only as long as it is less than $27,500 per year. Your employer's contribution and any voluntary salary sacrifice contributions are counted towards this concessional contribution cap. Before choosing to salary sacrifice your voluntary contributions, check how close you are to this limit. If the contributions you make through salary sacrifice push you above the concessional contribution cap, you’ll end up paying a higher rate of tax.
The after-tax contributions you make to your super are known as ‘non-concessional’ contributions and don’t fall under the same cap as employee contributions or salary sacrificed contributions. They’ve already been taxed at your marginal tax rate, which could be up to 47 per cent. These contributions are not taxed once they enter your super fund. However, there is a non-concessional contribution cap of $100,000 per year. If you make any additional contributions that exceed this amount, you will be taxed on those. If you are under 67 years of age, you could choose to bring forward two years of contributions, up to a total of $330,000, without paying any extra tax. But you won’t be able to make any non-concessional contributions for the following two financial years.
Government co-contribution
If your total assessable income is below a specific limit, your after-tax contributions may qualify you for a co-contribution from the government of up to $500. Salary sacrificing, however, will not make you eligible for this co-contribution.
Your financial situation
While investing in your super can often be a financially wise decision, there may be situations when you need to give a higher priority to other things. For instance, if you have credit card debt where you’re paying a high interest rate, it may make sense to use any surplus money to clear that debt before investing in your super. If you do want to make additional contributions, it may be better to make after-tax contributions rather than using a salary sacrifice arrangement. This allows you to repay any debt with your income before deciding on how much you put towards your super.
You need to consider all these aspects before deciding whether to choose salary sacrifice or after-tax contribution to get the most benefit from your contribution.
How do voluntary contributions benefit you?
Voluntary contributions to your super can be a good way of building your wealth in preparation for retirement. By adding money to your super account, you can benefit from the returns it earns, grow the money in the account, and potentially be more comfortable in retirement. You may want to do this because you feel your employer’s compulsory contribution alone isn’t enough to build your super to an amount you’ll be comfortable with. Or you may just want to add some extra money to live more comfortably after you retire.
You can also save some money on your taxes as contributions to your super within the concessional contributions cap are taxed at a lower rate than the marginal tax rate you probably pay. You’ll also pay a lower tax rate on any returns on investments made by your super fund compared to other investments.
Another potential benefit comes if you’re planning to buy your first home. Voluntary super contributions can help you qualify for the government’s First Home Super Saver Scheme, where you can access these contributions to help pay the deposit on your house.
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