Salary Sacrifice Strategies: How to Maximise Your Super While Minimising Tax

Salary sacrifice is one of the most powerful wealth-building strategies available to Australian workers, offering the dual benefits of reducing your current tax bill while simultaneously accelerating your retirement savings. Yet many Australians fail to take advantage of this opportunity, leaving thousands of dollars on the table each year. In this comprehensive guide, we explain exactly how salary sacrifice works, who benefits most, and how to implement an effective strategy.

Understanding Salary Sacrifice into Superannuation

Salary sacrifice, also known as salary packaging, is an arrangement where you agree with your employer to redirect a portion of your pre-tax salary into your superannuation fund. This arrangement must be set up before you earn the income, meaning you cannot retrospectively salary sacrifice earnings you have already received. The key advantage is that these contributions are taxed at just 15 per cent within your super fund, compared to your marginal tax rate which could be as high as 45 per cent plus the 2 per cent Medicare levy.

When you salary sacrifice, the amount you redirect is deducted from your gross salary before income tax is calculated. This means your taxable income decreases, resulting in lower income tax payable. The trade-off is that these funds become locked within superannuation until you reach your preservation age and meet a condition of release, so salary sacrifice is best suited for building long-term retirement wealth rather than short-term savings goals.

The Tax Advantage Explained

To understand the tax benefits of salary sacrifice, consider a practical example. Sarah earns $120,000 per year, placing her in the 37 per cent marginal tax bracket (plus 2 per cent Medicare levy). If she takes an additional $10,000 as salary, she would pay $3,900 in income tax on that amount, leaving her with $6,100 after tax. However, if Sarah salary sacrifices that $10,000 into super, it is taxed at just 15 per cent, meaning $8,500 goes into her retirement savings.

In this example, Sarah gains an additional $2,400 in her super compared to taking the money as after-tax salary and making a non-concessional contribution. Over a 30-year career, with compound returns at 7 per cent annually, this single year's advantage of $2,400 could grow to over $18,000 in additional retirement savings. Multiply this effect across decades of salary sacrifice, and the impact becomes truly significant. Use our superannuation calculator to model how salary sacrifice could accelerate your retirement savings.

Concessional Contribution Cap Considerations

Salary sacrifice contributions are classified as concessional contributions, which also include your employer's Super Guarantee contributions. These concessional contributions are subject to an annual cap, which for the 2024-25 financial year is $30,000. If you exceed this cap, the excess amount is added to your assessable income and taxed at your marginal rate, plus an interest charge. This effectively eliminates the tax advantage and can result in a worse outcome than not salary sacrificing at all.

When planning your salary sacrifice strategy, you must account for your expected Super Guarantee contributions. For example, if you earn $100,000 and your employer contributes 11.5 per cent, that is $11,500 in employer contributions. This leaves room for $18,500 in salary sacrifice before reaching the $30,000 cap. Failing to account for employer contributions is a common mistake that can lead to inadvertently exceeding the cap.

Carry-Forward Contributions Strategy

Since 1 July 2019, Australians with a total superannuation balance below $500,000 have been able to carry forward unused concessional contribution cap space for up to five years. This provides significant flexibility for those whose income or circumstances vary from year to year. For instance, if you only contributed $15,000 in concessional contributions in a previous year, you have $15,000 in unused cap space that can be utilised in a future year.

The carry-forward rule is particularly valuable in several situations. If you receive a large bonus, inheritance, or one-off income, you can make a larger salary sacrifice contribution using accumulated cap space. It is also helpful for those returning to work after career breaks, allowing them to make catch-up contributions. To determine your available carry-forward amount, you can check your contribution history through your myGov account linked to the ATO.

Who Benefits Most from Salary Sacrifice?

Salary sacrifice provides the greatest tax benefit to those in higher marginal tax brackets. If you earn above $45,000 per year, you are in at least the 32.5 per cent tax bracket, meaning you save at least 17.5 percentage points on every dollar salary sacrificed compared to taking it as income. The benefit increases for those earning above $120,000, who are in the 37 per cent bracket, and is maximised for those earning above $190,000 in the 45 per cent bracket.

However, salary sacrifice is not suitable for everyone. If you are on a lower income and may be entitled to the government super co-contribution, making after-tax personal contributions might be more beneficial. Similarly, if you need access to funds before retirement for goals like a home deposit, salary sacrifice locks money away until preservation age. It is essential to balance immediate financial needs against long-term retirement planning.

Division 293 Tax for High Income Earners

High income earners should be aware of Division 293 tax, which applies an additional 15 per cent tax on concessional contributions for individuals with income and concessional contributions exceeding $250,000. This additional tax effectively doubles the contributions tax rate to 30 per cent for affected individuals. While this reduces the tax advantage, salary sacrifice still provides benefits compared to taking the income as salary, which would be taxed at 47 per cent including Medicare levy.

If your income fluctuates around the $250,000 threshold, strategic timing of salary sacrifice contributions can help minimise Division 293 tax exposure. Working with a financial advisor or tax professional can help you navigate this complexity and optimise your contribution strategy across different income years.

Setting Up a Salary Sacrifice Arrangement

Establishing a salary sacrifice arrangement is typically straightforward but requires following the correct process. First, speak with your payroll or human resources department to confirm your employer offers salary sacrifice and to obtain the necessary forms. The arrangement must be documented in writing and agreed upon before you earn the income to which it applies. You cannot retrospectively salary sacrifice income already earned.

Most employers allow you to specify a fixed dollar amount or a percentage of your salary to be sacrificed each pay period. Consider starting with an amount you are comfortable with and gradually increasing it as you adjust to the reduced take-home pay. Remember to review and adjust your arrangement if your circumstances change, such as receiving a pay rise or approaching the concessional contribution cap.

Combining Salary Sacrifice with Other Strategies

Salary sacrifice works well in combination with other superannuation strategies. For married couples, spouse contributions may provide additional benefits if one partner earns significantly less than the other. The lower-earning spouse may also be eligible for the government super co-contribution if they make personal after-tax contributions. Coordinating strategies between partners can maximise overall household super savings and tax benefits.

Additionally, if you have unused carry-forward cap space and receive a lump sum such as a bonus or leave payout, you might combine salary sacrifice with a personal deductible contribution to fully utilise your available cap. This requires careful planning and potentially working with a financial advisor to ensure contributions are correctly categorised and claimed.

Conclusion

Salary sacrifice into superannuation remains one of the most effective wealth-building strategies for Australian workers, particularly those in higher tax brackets. By understanding the concessional contribution caps, taking advantage of carry-forward provisions where applicable, and carefully planning your contribution strategy, you can significantly accelerate your retirement savings while reducing your current tax burden.

Before implementing a salary sacrifice strategy, consider your complete financial situation, including your immediate cash flow needs, existing debts, and long-term retirement goals. For complex situations or high-value strategies, consulting with a qualified financial advisor can help ensure you maximise the benefits while avoiding potential pitfalls such as exceeding contribution caps.