Salary sacrifice is one of the ‘financial’ terms that most of us have heard of, and believe we should do, but not all of us know why. The term ‘sacrifice’ can summon thoughts of ‘giving up’ or ‘forfeiting’ or ‘forgoing’ something, but this could not be further from the truth when talking about salary sacrificing. So why is it such a popular strategy?
The main reason that salary sacrificing is so appealing is the tax advantages we gain from it. This is due to the part of your salary which is ‘sacrificed’ being deducted from your income before it is taxed. It is still taxed at the 15% contribution rate when it is placed into your super, which is lower than the bottom tax rate, but you are still better off overall. For example, lets see how $1000 looks under two scenarios for an average person.
- Salary sacrificed to super – $1000 (taken out pre-tax) – 15% contribution tax = $850 into your super account.
- Taken as income – $1000 – 32.5% marginal tax rate = $675 in your pocket.
The above example shows that you are $175 better off by salary sacrificing, or more correctly, you have saved $175 in tax by salary sacrificing, but the real advantages are most often a lot more than this. The $675 we have in our pocket generally doesn’t stay there very long, it is turned into clothes, take-away dinners, movie tickets or X-box games. On the other hand, the $850 stays longer in our super, a lot longer for some, and not only does it stay, it grows, and it grows, and it grows. This potentially, given time and a suitable investment allocation, could turn our $175 tax saving into thousands of extra dollars in our retirement.
In fact, if you managed to do this every month for the next 10 years, a growth investor could see that $175 tax saving alone turn into more than $35,000 extra in their super. If you add the other $675 which is also being salary sacrificed, and that’s an extra $170,000 in your super over 10 years. That could possibly make a massive difference to the lifestyle you are able to enjoy in your retirement.
The reason it is called ‘sacrificing’ is because we are ‘sacrificing’ money which we could have today for our future self to use in retirement, and while this is a great strategy, having that $650 today as the cost of living rises maybe more appropriate for you. If you are unsure of how best to structure your finances to suit your individual needs, call the team at Steve May Financial Services and start the conversation today.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
