The recent lowering of the annual concessional super contribution limits from $30,000 (or $35,000 for those over the age of 50) to $25,000 doesn’t leave much room for salary sacrifice contributions. So is a superannuation salary-sacrificing still worth it?
What is the most tax-friendly way to continue growing your savings in light of the lower super contribution limits? If your current annual income exceeds your current lifestyle needs, you will definitely be hunting for a more tax effective way to save some of the extra cash for a rainy day.
For most employees, what immediately comes to mind is superannuation given the concessionary tax rates. But is it worth it to still sacrifice your salary in order to maximize on the funds in your super?
There is a good imperative why superannuation remains the most effective retirement savings vehicle. The salary sacrifice contributions that are made to the fund will be taxed at 15% which is way below the marginal tax rate that someone earning a high income will have to pay on their income. Currently, the highest marginal tax rate for individuals stands at 45%. Even if you lie in the lowest income bracket, a salary sacrifice is still a more effective savings strategy. The lowest marginal tax rate stands at 19% plus the Medicare Levy.
The 19% marginal tax rate applies on an income ranging from $18,200 to $37,000. Below $18,200 is the tax-free threshold. Above $37,000 attracts a tax rate of 32.5% plus a 2% Medicare Levy. A combination of your Super Guarantee plus salary-sacrificing at this income level provides for very significant tax savings.
Choosing to convert your current salary into your superannuation via a salary packaging will result in more significant savings and a good retirement nest egg than receiving this salary as a taxable income and getting taxed at the marginal rate. The earnings that you generate from these contributions are also exempt from taxes when you decide to transfer them to your fund’s pension account. Once you are over the age of 65, you can withdraw these contributions without having to incur additional taxes. This is what makes salary-sacrificing such a novel retirement savings strategy particularly for those in the lower income brackets. Not only is salary-sacrificing tax effective but it will also not interfere with your access to the funds.
A $25,000 Superannuation Limit
What you should keep an eye on when entering into a salary-sacrificing arrangement with your employer is the superannuation contribution cap for this year. The maximum contribution amount that the employer can make into your superannuation fund, including the salary sacrifice contributions and the super guarantee is $25,000.
So you need to watch out on your salary sacrifice contributions so that you don’t exceed the $25,000 limit otherwise your contributions could be taxed at the marginal rate and you will incur an excess contributions charge (ECC).
Tax Deductible /Concessional Contributions
Apart from the tax advantages of salary sacrificing, you could also take advantage of the new entitlement that allows you to claim your contributions to your super as tax deductible contributions. To claim your super contributions as tax deductible, you will have to lodge a notice of intention to file claims on the contributions with your superannuation fund trustee. The notice must be acknowledged by the trustee for the tax-deductible claim to be valid.
As you go up the earnings ladder, the $25,000 super contributions cap begins to become a severe limitation and gives you little leeway to make extra salary sacrifice contributions. It puts a cap on the potential wealth that you can generate through the tax savings available in a super fund. If you are a supersaver, you will need to explore new tax effective strategies that will help you set aside more cash for retirement.
Non Concessional Contributions
If you are maxing out on your concessional contributions, one route that you could take is making personal contributions that will not be claimed as tax deductions. These are the non-concessional contributions. They offer you an alternative route that you can use to give your superannuation balance a bump.
The non-concessional contributions are subject to an annual contribution cap of $100,000 and the overall superannuation balance must not exceed $1.6 million at the start of the financial year. At higher income levels, you could also consider using a family trust.
Salary sacrificing might not be an optimal solution in all situations but there are certain income thresholds, when you are in a better tax position, where salary-sacrificing offers the most tax effective route to build your retirement wealth. Need more help structuring out your salary sacrifice arrangements with your employer? Talk to an accountant Melbourne professional for further guidance.
