Before tax contributions (salary sacrifice)
By adding to super from your before-tax salary, you could reduce your taxable income and reduce your tax bill, while growing your retirement savings. Take a look at the benefits, caps and how to salary sacrifice.
What are before-tax contributions?
Before-tax (concessional) contributions are contributions added to your super account before your income tax has been deducted. These are generally taxed at 15% when added your super account, instead of your marginal income tax rate, which can be as high as 45%.
Salary sacrifice is a type of before-tax contribution. It's an arrangement between you and your employer to redirect some of your before-tax (gross) salary into your super account instead of your bank account. It means your take-home pay will reduce in the short-term, but you end up with more in the long-term.
This can reduce the tax you pay and give you more money in the long-term. Salary sacrifice helps you pay less tax in three ways:
Reduce your income tax
Before-tax salary paid to your super account gets taxed at 15% (unless your combined income and super contributions are more than $250,000, in which case the tax is 30%). This compares to any salary you take home which will get taxed at your usual marginal tax rate, which can be as high as 45% (plus Medicare levy).
Reduce your taxable income
You can reduce your taxable income with every dollar salary-sacrificed to super. The more before-tax salary you put into your super, the lower your taxable income will be.
Lower tax on investment earnings
Generally, the investment earnings your super money generates is taxed at a low rate of up to 15%, while investment earnings made outside of super are taxed at your marginal tax rate. In addition, you usually don't have to declare your super-related investment earnings on your tax return.
If your employer doesn’t offer salary sacrifice, you can make after-tax contributions & claim a tax deduction.
Compare the tax rates for 2023/24
Could you pay less tax by salary sacrificing? The amount of income tax you pay depends on how much you earn each year. If you salary sacrifice, you pay the concessional tax rate instead of your income tax, which can lead to significant savings.
|Income||Income tax rate*||Concessional tax rate in super||Tax saved with |
* Income tax rate does not include the Medicare levy; an additional tax amount is payable.
1 Low Income Tax Offset may apply
2 Please refer to ATO website for additional taxes
Questions for your employer:
- Will your employer allow you to salary sacrifice into super?
- Are you able to start or stop at any time?
- Can you change amounts at any time?
- Does your employer charge an administration cost?
- Does your employer set any limits to how much you can salary sacrifice?
How to set up salary sacrifice
If salary sacrifice is right for you, speak to your employer who can direct some of your pay into your super. If your employer doesn't allow salary sacrifice arrangements, you can make an after-tax contribution & then claim a tax deduction.
Salary sacrifice limitations
When setting up your salary sacrifice you should consider whether the amount you wish to salary sacrifice will:
- Cause you to exceed your concessional (before-tax) contributions cap and attract additional tax – this concessional contributions cap limits the amounts that can be contributed to your super fund and still receive the concessional tax rate of 15%.
- Attract a Division 293 tax. This occurs when your income is more than $250,000.
- Reduce your take-home pay by too much.