As the year-end fast approaches, it’s a good time to think about how you can start working towards being better off.
Before the end-of-year holidays start shifting into full swing and before you know it you’re splurging your hard-earned money, take a moment to think about whether you can give yourself more, starting this coming year.
Boost your future with pre-tax dollars
It makes financial sense to put money away for your future rather than sending it to the tax office never to be seen again. So if your employer allows you to salary sacrifice some of your pre-tax income next year, you may be able to put an agreement in place (be sure to get it in writing) so you can boost your super and reduce your tax bill at the same time.
In a nutshell, salary sacrifice lets you pay extra money into your super before your salary is taxed. The money is taxed at a concessional rate of taxi of 15% which is probably less than the tax rate applied to your earnings. There’s a bit of a catch because you can only deposit a limited amount ($30,000 per year if you’re under 50 in the 2016/17 financial year; $35,000 if you’re older).
A little makes a big difference
Let’s look at how salary sacrifice can work.
Angie works as a marketing consultant. She’s 50 years old. Her goal is to start using her salary of $80,000 more effectively so she can build up her super.
Using her current savings plan she saves about $10,010 a year—each fortnight she directs $385 from her pay into her regular bank account.
When she originally sought financial advice, she asked whether it was a good idea to deposit the $10,010 from her savings account into super (after-tax dollars) or whether there was a better way.
Let’s see how Angie adds $15,282 to her super (instead of $10,010) without reducing her take-home pay.
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Angie’s income tax position
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After-tax contributions
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Salary sacrifice contributions
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Gross salary
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$80,000
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$80,000
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Less salary sacrifice contributions
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Nil
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($15,238)
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Reduced gross salary
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$80,000
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$64,672
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Income tax, Medicare levy
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($19,147)
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($13,829)
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Net salary
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$60,853
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$50,843
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After-Tax contributions to super
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($10,010)
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Nil
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Take-home pay after contributions
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$50,843
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$50,843
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Net income tax saving
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$5,318
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Judith’s super contributions position
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Super Guarantee contributions (9.5%)
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$7,600
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$7,600
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Salary sacrifice (pre-tax) contributions
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Nil
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$15,238
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15% contributions tax
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($1,140)
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($3,425)
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Total net concessional contributions
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$6,460
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$19,413
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Plus non-concessional contributions to super
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$10,010
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Nil
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Total net contributions for year
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$16,470
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$19,413
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Additional net contributions into super
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$2,943
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By salary sacrificing pre-tax dollars into super Angie significantly increases her super contributions for the year and benefits in several ways:
- Angie reduces her taxable income and pays less tax overall
- Extra money goes into her super account but at the concessional rate of 15%—nearly 10% less than her marginal tax rate
- By making regular payments into her super and increasing her super balance, Angie benefits more from compound growth and dollar cost averaging—two powerful ways to save money over time.
We’re here to help
If you’re wondering whether you could be making more of your money this coming year, come and see us. We’ll help you work out the financial strategies that can help you reach your goals and whether you can save tax and keep more for yourself in the long run. It’s never too late or too early to put plans in place for your future. Call us today.
© AMP Life Limited.
(i) Or 30% if you earn more than $300,000 a year.
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