THE beginning of a new financial year is the ideal time to start a salary sacrifice plan and this year there is a special reason to make a large commitment.
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Salary sacrifice is a very effective tax saving strategy for most workers.
It is especially effective for those in the latter stages of their career who are keen to build up retirement savings.
At that stage children are often becoming independent and the mortgage is paid off or well under control making surplus income available for investment.
Salary that is sacrificed into superannuation is taxed at only 15 per cent instead of marginal rates.
Those in the second tax bracket between $37,000 and $80,000 income pay 34.5 per cent tax including Medicare Levy. Those earning over $80,000 pay 39 per cent tax. The threshold may be raised to $87,000.
These tax rates cover the majority of workers so they can save tax of either 19.5 or 24 per cent on income sacrificed into super. Would we rather have $61 cash in our hand or $85 in our super fund?
Young people with other priorities in life may choose the cash but older workers often prefer the super.
In this tax year the maximum concessional (tax deductible) contributions to super are $30,000 for people up to age fifty and $35,000 for those older. This provides a special opportunity because it is likely to be the last year the limits are so high.
The Government announced in the recent Budget that it intends to cut these limits to $25,000 for everyone from July 2017.
Therefore people in a position to make substantial salary sacrifices should take advantage of the opportunity to maximise contributions while they can.
The concessional contribution limits include the compulsory employer contributions of 9.5 per cent.
For example if a worker has a salary of $80,000 their super guarantee contributions will be $7,600 so they can sacrifice a maximum of $22,400 if under age fifty and $27,400 if fifty or over.
These may sound like large amounts of income to give up but it doesn’t cost that much out of take home pay. Our person on $80,000 salary only needs to give up $14,672 of after-tax pay to sacrifice $22,400 pre-tax. That is $282 per week or $564 per fortnight.
Contributing regularly each payday also has the advantage of being the most painless way to achieve a large contribution for the year.
The government intends to make several changes to the super rules to come into effect in July 2017.
Their general thrust will be to limit the use of the super tax concessions so investors should maximise the opportunity while they can.
