Did you know you can boost your retirement savings and reduce the tax you pay on your income at the same time? Salary sacrifice to super allows high-income earners to contribute extra funds to their superannuation directly from their pre-tax income. This strategy not only helps grow your super balance, it also provides a tax deduction, making it a smart way to prepare for a comfortable retirement while optimising your tax savings.

Schedule a complimentary consultation with our experts today to explore how salary sacrifice and an SMSF can work for you.

Why salary sacrifice can work for some high-income earners

High-income earners often face high marginal tax rates, making salary sacrifice a tax-effective strategy to reduce taxable income and gain a significant tax benefit. By allocating a portion of your pre-tax salary to superannuation, the contributions are taxed at a concessional flate rate of 15%—significantly lower than the top marginal income tax rate, which can reach 45%. This approach allows you to pay less tax while growing your retirement savings.

If your combined income and concessional super contributions exceed $250,000, an additional 15% Division 293 tax applies to these contributions, resulting in a total tax of 30%. Even with this additional tax, the rate is still lower than the top personal income tax rate, providing substantial tax savings and encouraging more super contributions.

Salary sacrificing also offers the benefit of compounding investment returns within your super fund. This combination of tax benefits and increased retirement savings can make salary sacrificing an effective tool for wealth building, especially for those in higher income brackets. This article focuses on the tax efficiencies that can be gained from salary sacrifice and the potential to increase your retirement savings. If you require advice on what to invest in, we recommend you reach out to a financial advisor.

How much can you put into super?

Boosting your superannuation using salary sacrifice can be a tax-effective way to grow your retirement savings. Understanding the concessional contributions cap and leveraging carry-forward rules can help you avoid paying more tax than you need to and maximise the tax benefits of salary sacrificing into super.

Understanding the concessional contributions cap

The concessional contributions cap sets a limit on the amount of before-tax contributions, such as salary sacrificed contributions and employer super guarantee payments, that can be added to your super fund at a concessional tax rate. For most people, the cap is $27,500 per financial year. This includes all pre-tax contributions made through a salary sacrifice arrangement or your employer’s mandatory contributions.

Exceeding this cap means your extra contributions will be taxed at your marginal tax rate instead of the lower concessional 15%. You may also need to pay more tax and report this on your tax return. Keeping track of your salary sacrificed contributions and any additional before-tax contributions can help you avoid exceeding the cap and missing out on the tax benefits.

Leveraging carry-forward contributions for unused cap amounts

The carry-forward rule allows you to use unused concessional contributions from previous years if your total super balance is below $500,000 at 30 June of the prior financial year. This can be particularly useful if you didn’t reach the concessional cap in earlier years.

By combining unused cap amounts with your current financial year’s limit, you can make extra contributions during higher-income years, mitigating your tax position. For example, this strategy can help you reduce your taxable income, pay less tax, and build more money for retirement. Using a salary sacrifice calculator or consulting with your payroll team can help you determine how much you can contribute under this rule.

Schedule a complimentary consultation with us should you wish to get clarity on what your unique carry forward contributions cap is.

Tax rules that can impact high-income earners

For high-income earners, understanding tax rules is essential for effective planning. Salary sacrifice contributions can provide significant tax benefits, but specific regulations, like Division 293 tax, must be considered to manage contributions effectively and avoid unexpected costs.

Understanding your assessable income implications

Salary sacrificing into your superannuation fund lowers your personal assessable income since the sacrificed amount is not included in your taxable income. This can help reduce your effective tax rate and the overall amount of tax you pay.

How to keep your contributions on track

Effectively tracking your super contributions can help you maximise tax benefits, avoid penalties, and maximise your retirement savings.

Annual review of salary sacrifice contributions

Fluctuations in income, such as bonuses or variable earnings, can impact your super guarantee and risk exceeding the concessional contributions cap. Conducting an annual review of your salary sacrifice arrangements helps ensure your contributions remain within the cap and work towards your financial goals. This proactive approach allows you to optimise your super while avoiding additional taxes and penalties on excess contributions.

Setting up contribution alerts and monitoring

To stay within the concessional contributions cap, you can use tools like your super fund portal or my.gov.au to set up contribution notifications. These alerts provide real-time updates on your salary sacrificed contributions, employer super guarantee payments, and overall balance in your super account. By monitoring your contributions closely, you can adjust your pre-tax contributions as needed to avoid exceeding the cap. This simple step helps you maintain your tax benefits while ensuring your super account grows effectively and stays compliant with contribution limits.

Reviewing contributions in high-income years

High-income years offer an opportunity to grow your super while reducing taxable income. If your total super balance is below $500,000 at the end of the previous financial year, you can use the carry-forward rule to contribute unused concessional amounts from up to five prior years. By combining this with your salary sacrificed contributions, you can stay within the annual cap while maximising both your retirement savings and tax deductions.

Ensuring a compliant salary sacrifice arrangement

To make the most of salary sacrifice contributions and secure tax benefits, it’s important to ensure your arrangement meets compliance standards. If contributuing to a Self Managed Superannuation Fund (SMSF), proper documentation and compliance are essential to avoid risks and maximise the advantages of salary sacrificing into super.

If you would like to speak to someone about setting up an SMSF, reach out to us today.

Setting up documentation with your employer

A salary sacrifice arrangement requires a formal agreement with your employer before any contributions are made. This documentation should detail the terms of the arrangement, including the amount of pre-tax pay to be sacrificed and the frequency of the contributions. Without this agreement, the contributions may be treated as regular income, increasing your taxable income and preventing you from accessing concessional tax benefits.

Ensure the agreement is signed by both parties and reviewed periodically, especially if your employment terms change or you adjust your salary sacrifice contributions. Maintaining accurate documentation ensures your arrangement remains compliant and tax-effective.

Importance of a compliant super fund

Contributions must be made to a compliant super fund to qualify for concessional tax treatment. A complying super fund is one that meets the Australian Taxation Office’s (ATO) regulatory requirements, allowing salary sacrificed contributions to benefit from lower tax rates. These funds also ensure your retirement savings are secure and accessible only under permitted conditions.

Using a non-compliant fund can lead to higher taxes and put your contributions at risk. Contributions to such funds may not qualify for concessional tax rates, and the fund may lack the regulatory protections required to safeguard your retirement savings.

Things to keep in mind before you commit to salary sacrificing

Salary sacrificing is a tax-effective way to grow your retirement savings and reduce taxable income, but it’s important to evaluate its impact on your take-home pay and overall financial situation. Salary sacrificed contributions reduce your pre-tax pay, which lowers your current cash flow. This change can affect your ability to cover everyday expenses or unexpected costs. To manage this effectively, calculate how much of your before-tax pay can be allocated to salary sacrifice super contributions without straining your budget. Using a salary sacrifice calculator can help you determine the optimal amount to contribute while maintaining financial stability.

Contributions made through a salary sacrifice arrangement are locked in your super fund until you reach your preservation age, which is between 55 and 60 depending on your birth year, and meet a condition of release. Since super contributions are generally inaccessible until retirement, salary sacrifice works best for excess income that you don’t need in the short term. By balancing your salary sacrifice deduction with your immediate and medium-term needs, you can enjoy tax benefits, increase your concessional super contributions, and build long-term retirement savings without compromising your financial flexibility today.

It is recommended you speak with a financial planner if you wish to gain advice on wealth planning.

How to make the most out of your contributions

Maximising super contributions requires a clear strategy, including salary sacrifice super contributions and managing concessional caps. High-income earners can reduce taxable income, pay less tax, and grow their super fund while staying compliant with Division 293 tax rules. Regular reviews and professional advice ensure your salary sacrificed contributions remain tax-effective and aligned with your goals.