What is salary sacrifice?

A salary sacrifice agreement is a financial arrangement with your employer to contribute a specified amount of your pre-tax salary or potential bonus directly into your super. The goal is to pay less in tax and boost your super balance, making it easier to plan and budget for your retirement.

Benefits

  • Easier budgeting. Money isn’t paid directly into your bank account, so you’re less likely to miss it. This makes it easier to save for your retirement.

  • Maximise your super contributions. Boosting your superannuation with contributions may significantly impact the lifestyle you can afford in retirement.

  • Reduce your taxable income. Salary-sacrificed super contributions are part of your concessional (or before-tax) contributions for the financial year. Mandatory contributions to your super, made by your employer, are also part of these concessional contributions. Remember there is a concessional contributions cap, opens in new window and exceeding it will incur an offset tax.

Disadvantages

  • Reduced spending and borrowing power. Salary sacrificing can limit the amount you have available for daily expenses and financial commitments. You’ll need to budget carefully to ensure you have enough to cover necessities. Having less take-home pay can also impact your ability to qualify for loans.

  • Tax rate minimums. Contributing extra pre-tax dollars into superannuation could mean that money is taxed higher than your normal salary if you’re a lower income earner, due to the minimum tax rates applied to super funds. This means that the tax savings could be minimal at best, and detrimental at worst if your personal income tax is lower than the minimum super rate.

  • Locked-up finances. There are strict rules about accessing superannuation funds before you retire. In most cases, you won’t be able to access your sacrificed contributions until you reach preservation age. Typically, this means these funds won’t be available in an emergency.

How to salary sacrifice

Understanding how salary sacrifice works is key and setting up salary sacrifice is normally a straightforward process. If your employer agrees, you’ll need to arrange for them to have some of your pre-tax income paid straight into your super fund. This is in addition to the amount they already commit to your super. You can access these funds when you reach your preservation age. 

How much should I salary sacrifice?

Unless your employer has specific limitations, there’s no limit to how much you can salary sacrifice into your super. However, there are tax implications you should consider.

For example, before salary sacrificing, consider if the amount you want to sacrifice will:

  • exceed your concessional (before-tax) contribution cap
  • exceed the allowed contribution limits (as this attracts additional tax)

The Government’s MoneySmart, opens in new window website has a great super contributions optimiser calculator. This tool can give you an idea of how salary sacrificing can affect your super and take-home pay.

Who should salary sacrifice?

Salary sacrificing isn't for everyone. It’s generally more effective if you earn over the national minimum wage, and it’s important to balance contributions with your daily budget. Avoid exceeding the before-tax contributions limits, as there may be tax penalties if you go over this cap. Remember, compulsory employer contributions are included in your concessional contributions cap.

Understanding personal deductible contributions

Similar to a salary sacrifice arrangement, you may also have the option of making personal contributions to super and claim a tax deduction for these contributions. By making a personal super contribution and claiming it as a tax deduction, you’ll likely reduce your taxable income and be able to invest more in super.

Contact your employer to size up your savings and set up salary sacrifice. You should also seek advice from a financial adviser or tax professional before getting started.

Considering salary sacrifice?

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Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.

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