What is salary sacrifice?

The money used for salary sacrifice contributions comes from your before-tax income, which means you don’t have to pay income tax on that amount. However, you still have to pay the super contributions tax of 15%. If you’re a high-income earner, you may also have to pay an additional 15% tax on some or all of these contributions. 

Depending on how much you earn, this can be a significant tax savings. Income tax can be as high as 47% (including the Medicare levy), so you could potentially save between 17% and 32% tax on each contribution. 

Unlike other types of salary sacrificing, such as a car lease, you don’t have to pay Fringe Benefits Tax on your salary sacrifice super contributions. 

Salary sacrifice contributions count towards your concessional contributions cap. This cap is for the contributions you make from your before-tax income. For the 2023-24 financial year, the concessional contributions cap is $27,500.

However, if you didn’t use the total amount of your concessional contributions cap in previous financial years, it might be possible to increase your cap by the unused amount. 

Can I increase my concessional contributions cap? 

The total of your salary sacrifice contributions plus your other concessional contributions must not exceed your cap. These contributions may include:

1. Mandated employer contributions, such as super guarantee contributions or any other contributions your employer is required to make under an industrial award or workplace agreement.
2. Voluntary contributions your employer chooses to make on your behalf, such as to cover the cost of any life and disability insurance.
3. Personal super contributions that you claim a tax deduction for.

If you go over your concessional contributions cap, the ATO will apply your marginal tax rate on the excess amount, so you won’t receive the tax benefits of salary sacrificing.

If you want to contribute more than your concessional contributions cap, you might want to consider making a non-concessional contribution from your after-tax income. This has a much higher cap of $110,000 for the 2023-24 financial year. 

Aaron earns $145,000 a year. This puts him in a marginal tax bracket of 37%, not including the Medicare levy. He currently takes home $103,383 each year after tax and the Medicare levy, which works out to be around $3,976 per fortnight. 

Aaron is keen to increase the amount he is saving for retirement and to reduce the amount of tax he pays, so he decides to ask his employer to set up a salary sacrificing arrangement for him. He decides he can sacrifice an additional $400 each fortnight from his before-tax salary. This reduces his taxable income to $134,600. 

Now, Aaron takes home about $3,732 each fortnight, which is only $244 less than he was taking home before. However, by sacrificing $400 of his salary each fortnight, Aaron’s super gains an extra $10,400 per year (gross of contributions tax) – and that’s before compounding returns are taken into account!