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How to achieve a ‘free’ boost to your superannuation

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By John Beveridge - 
Salary sacrifice superannuation boost

There may have been changes to the forthcoming stage three income tax cuts but they do provide a unique opportunity to add money to your super account balance without suffering any reduction in your pay packet.

The reason why this is possible is through combining the reduction in tax with the salary sacrifice provisions to keep your take home pay steady but increase the amount being paid into your superannuation.

Effectively this salary sacrifice would save even more tax given that the contribution tax that is paid for money going into super is only 15% – much less than the marginal tax rate for most workers.

It may not be for everyone but this strategy is ideal for those with the financial capacity and the desire to build their retirement savings.

In this respect July 1 presents an opportunity to start sacrificing salary to super or to increase their contributions.

From little things, big things grow

Even very small extra contributions can grow to quite large amounts by the time of retirement due to the effect of compound interest over time and the tax advantages enjoyed by super funds compared to many other forms of saving.

In general terms, someone earning $80,000 could salary sacrifice up to $2469 a year without reducing their after-tax income due to the lower after-tax income being offset by the tax cut from stage three.

For those earning $120,000 in the next financial year, the break-even point would be a salary sacrifice contribution of up to $3940 while for those on $140,000 the sweet spot is $6113 before a reduction in their take home pay.

Tricking yourself into big savings

In many ways this salary sacrifice is as much a psychological strategy as a financial one, given people don’t generally miss anything if their after-tax pay remains the same.

Of course, although only the individual concerned can establish if extra super contributions are the best use of their tax cut.

Other potential destinations for the extra tax cut money include with paying extra on the mortgage or using it to make a dent in the rising cost of living a couple of possibilities.

Salary sacrifice underused despite great potential

Usually arranging a salary sacrifice is a simple affair arranged through the company pay office but it is a very effective tax strategy that is surprisingly underused, with many workers unwilling to have their money tied up until they retire.

However, financial planners say it is an excellent way to reduce personal tax paid for anyone with an income above $45,000 a year, with those below this threshold generally paying a lower tax rate that they would get by making an extra super contribution.

Even among those super fund members above the age of 40 who face a shorter wait for their money, the voluntary salary sacrifice rate is often around 15% for many super finds.

The only other catch to watch out for when making a salary sacrifice contribution is to make sure that the annual concessional contribution cap which is currently $27,500 a year is not breached, noting that this cap includes compulsory super contributions from the employer.

More good news to bolster nest eggs

Even for those who don’t fancy making extra salary sacrifice contributions, there is also some good news that will help to beef up their super nest eggs anyway.

On the same day that the tax cuts begin on July 1, the compulsory super contribution rate is rising from the current 11% to 11.5% and is due for one last rise to reach 12% from July 1, 2025.

Over time these increases should help many more retirees to be self-funded and not rely on the age pension, at least in their early years of retirement.