Salary Sacrifice vs Employee Contributions: What’s Best for You?

In Australia, employees and employers alike often explore ways to maximise tax benefits, save for retirement, and enhance overall financial wellbeing. Two common strategies for achieving these goals are salary sacrifice vs employee contributions to superannuation.

While both options provide financial advantages, choosing the right approach can be confusing. Understanding the differences between salary sacrifice and employee contributions, their tax implications, and which option is best suited for your circumstances is crucial to making an informed decision.

In this blog, we will explore these two strategies in detail, breaking down how they work, their benefits, and which one might be more suitable for your financial situation.

What is a Salary Sacrifice Arrangement?

Salary sacrifice, also known as salary packaging, is an arrangement where an employee agrees to forgo a portion of their pre-tax salary in exchange for additional benefits, such as contributions to their superannuation fund, a new car (novated lease), or other approved benefits. Essentially, salary sacrifice reduces your taxable income, which can result in lower income tax payments.

For example, if your annual salary is $100,000 and you decide to salary sacrifice $10,000 into your superannuation, your taxable income would drop to $90,000. This reduction in taxable income could lead to lower tax obligations, depending on your marginal tax rate.

Benefits of Salary Sacrifice

1. Tax Savings: The primary benefit of salary sacrificing into superannuation is the potential to reduce your taxable income. Since super contributions made through salary sacrifice are taxed at the concessional rate of 15% (or 30% if your income exceeds $250,000), this is often lower than most employees’ marginal income tax rate.
2. Boosting Superannuation: A salary sacrifice contribution is an excellent way to increase your superannuation balance for retirement. By allocating a portion of your salary directly into your superannuation fund instead of receiving it as take-home pay, you can enhance your retirement savings while benefiting from a reduction in taxable income. The more money you contribute to your super early on, the greater your investment’s potential for long-term growth due to the effects of compounding.
3. Flexibility with Benefits: In addition to superannuation contributions, salary sacrifice arrangements can be used for other approved benefits such as novated leases for vehicles, additional leave, and certain work-related expenses. This flexibility allows employees to structure their remuneration to align with personal and financial goals.

Potential Downsides of Salary Sacrifice

• Concessional Contribution Cap: While salary sacrificing into superannuation offers tax advantages, there are limits to how much can be contributed at the concessional tax rate. As of the 2023-2024 financial year, the concessional contributions cap is $27,500 per year, which includes employer contributions (including the Superannuation Guarantee, currently 11%) and salary sacrifice contributions. It is important to manage your super contributions effectively to avoid exceeding this cap, as doing so could result in additional tax liabilities. Additionally, understanding the carry-forward rules for unused contributions can help optimise your superannuation strategy.
• Reduced Take-Home Pay: Since a portion of your salary is being sacrificed, your immediate take-home pay will be lower. It’s important to ensure you still have enough to meet your day-to-day living expenses before committing to a salary sacrifice arrangement.
• Impacts on Other Entitlements: Salary sacrifice can affect entitlements such as annual leave, long service leave, and redundancy payments, which are typically calculated based on your pre-sacrifice salary. It’s crucial to consider these potential impacts, particularly if you anticipate changes in your employment status.

Tax Benefits of Salary Sacrifice

One of the most compelling reasons to consider salary sacrifice is the array of tax benefits it offers. By opting for salary sacrifice, you can effectively reduce your taxable income, which in turn lowers the amount of income tax you need to pay. This strategy can be particularly advantageous if you are in a higher tax bracket.

For instance, if you earn $100,000 annually and decide to salary sacrifice $10,000 for your superannuation, your taxable income would decrease to $90,000. This reduction can lead to a lower tax bill, leaving more money in your pocket.

Additionally, salary sacrificed super contributions are taxed at a concessional rate of 15%, which is often significantly lower than your personal income tax rate. This means you not only save on income tax but also benefit from a lower tax rate on your super contributions.

By leveraging the tax benefits of salary sacrifice, you can enhance your retirement savings while enjoying immediate tax relief.

What Can I Salary Sacrifice?

Salary sacrifice isn’t limited to just superannuation contributions; it can encompass a variety of benefits that can help you achieve your financial goals. Here are some common options:

• Superannuation Contributions: Boost your retirement savings by sacrificing a portion of your salary into your super fund. This is a popular choice due to the tax advantages and long-term growth potential.
• Fringe Benefits: You can opt for salary sacrifice for fringe benefits such as cars, laptops, or other goods and services. These benefits can be particularly useful if they align with your personal or professional needs.
• Exempt Benefits: Certain benefits, like health insurance premiums, education expenses, or other exempt benefits, can also be included in a salary sacrifice arrangement. These benefits are not subject to fringe benefits tax, making them an attractive option.

It’s crucial to be aware of the limits on the amount you can salary sacrifice and to consult with your employer and a financial advisor. This ensures that your salary sacrifice arrangement is tailored to your individual circumstances and maximises your financial benefits.

Setting Up a Salary Sacrifice Arrangement

Setting up a salary sacrifice arrangement involves a few key steps to ensure it aligns with your financial goals and complies with regulations. Here’s how you can get started:

1. Consult with Your Employer: Begin by discussing your salary sacrifice options with your employer. They can provide information on what benefits are available for salary sacrifice and any company-specific policies.
2. Determine the Amount: Decide how much of your salary you want to sacrifice each pay period. It’s important to strike a balance between boosting your benefits and maintaining sufficient take-home pay for your daily expenses.
3. Complete the Necessary Paperwork: Fill out the required forms and agreements to formalise your salary sacrifice arrangement. This may include signing a salary sacrifice agreement and providing details of the benefits you wish to receive.
4. Review and Adjust: Regularly review your salary sacrifice arrangement to ensure it continues to meet your needs. Adjust the amount or benefits as necessary to stay aligned with your financial goals.

Given the complexities involved, seeking professional advice can be invaluable. A financial advisor can help you navigate the intricacies of salary sacrifice and ensure you’re making the most of this strategy.

What are Employee Contributions?

Employee contributions refer to the voluntary after-tax contributions that employees make directly to their superannuation fund. Unlike salary sacrifice, employee contributions do not reduce your taxable income because the contributions are made from your after-tax earnings. However, these contributions may still offer tax benefits in the form of the Superannuation Co-contribution Scheme and potential eligibility for the Spouse Contribution Tax Offset.

Under the Superannuation Co-contribution Scheme, the Australian Government may match your contributions up to a maximum of $500 if you meet certain income thresholds. This can be a great incentive for low-to-middle-income earners looking to boost their superannuation balance.

Benefits of Employee Contributions

1. Access to Government Incentives If your total income is below a certain threshold (currently $58,445 for the 2023-2024 financial year), you may be eligible for the Superannuation Co-contribution. This allows low- and middle-income earners to receive up to $500 in government co-contributions for after-tax super contributions.
2. No Contribution Cap Impact After-tax contributions do not count towards the concessional contribution cap of $27,500. Instead, they count towards the non-concessional contribution cap, which is $110,000 per year for the 2023-2024 financial year. This allows employees who want to boost their retirement savings without affecting their concessional cap to do so.
3. Boosting Superannuation Like salary sacrifice, making additional after-tax contributions can significantly increase your superannuation balance over time. For individuals who are looking to accelerate their retirement savings without reducing their take-home pay, after-tax contributions can be an effective strategy.

Potential Downsides of Employee Contributions

• No Immediate Tax Savings: Unlike salary sacrifice, employee contributions do not provide an immediate reduction in taxable income. Therefore, if reducing your income tax is a priority, salary sacrifice may be a better option.
• No Concessional Tax Treatment: After-tax contributions do not benefit from the concessional 15% tax rate that salary sacrifice contributions enjoy. Since these contributions are made from your post-tax income, they are not taxed again when added to your super fund.
• Impact on Cash Flow: While after-tax contributions allow you to maintain your full pre-tax salary, they do require a direct outlay from your take-home pay. If you’re not careful, these contributions could impact your cash flow and budgeting.

Salary Sacrifice vs Employee Contributions: What’s Best for You?

Deciding between salary sacrifice and employee contributions depends on your individual financial goals, income level, and retirement planning strategy. Here are a few considerations that can help guide your decision:

1. Income Level

• If you’re a high-income earner and your marginal tax rate exceeds 15%, salary sacrificing into superannuation can provide substantial tax savings by lowering your taxable income and ensuring that your super contributions are taxed at the concessional rate of 15%.
• For lower-income earners, employee contributions may offer the added benefit of government co-contributions, which can be a significant incentive for boosting retirement savings.

2. Superannuation Contribution Caps

• If you’re close to reaching the concessional contribution cap of $27,500, making after-tax employee contributions allows you to continue growing your super without exceeding the cap. This can prevent you from facing penalties for exceeding the concessional cap.

3. Immediate Tax Benefits vs. Long-Term Growth

• If you’re looking for immediate tax benefits, salary sacrifice is typically the better option as it lowers your taxable income and provides a tax break in the current year.
• On the other hand, if you’re more focused on long-term growth and you’re not as concerned with immediate tax savings, after-tax contributions can help increase your super balance while allowing you to maintain your current salary.

4. Cash Flow Needs

• If you have significant financial obligations or rely heavily on your full pre-tax salary, salary sacrifice might reduce your take-home pay too much. In this case, employee contributions might be a better option, as they allow you to make voluntary contributions while still receiving your full pre-tax salary.
• If you’re comfortable with reducing your immediate cash flow, salary sacrifice can provide valuable tax savings and greater retirement savings over the long term.

5. Age and Retirement Goals

• For individuals nearing retirement, both salary sacrifice and employee contributions can play an important role in maximising superannuation savings. Salary sacrifice may be more beneficial if you are still within the workforce and earning a high income, while after-tax contributions might make sense if you’re looking to take advantage of government incentives or avoid exceeding the concessional contribution cap.

Choosing the Right Strategy: Expert Advice from Grey Space Advisory

Making the right decision between salary sacrifice and employee contributions requires careful consideration of your financial situation and goals. Navigating the complexities of superannuation and tax incentives can be challenging, but the team at Grey Space Advisory is here to help.

At Grey Space Advisory, we offer personalised financial and business advisory services that are tailored to your unique circumstances. Whether you’re looking to optimise your super contributions, maximise tax benefits, or develop a comprehensive retirement strategy, our expert team can guide you every step of the way.

Consult with Grey Space Advisory Today

Choosing between salary sacrifice and employee contributions is a crucial decision that can significantly impact your financial future. If you’re unsure about the best approach for your situation, contact Grey Space Advisory today for expert advice. Our experienced team will work with you to develop a strategy that aligns with your financial goals and helps you make the most of your superannuation.

Get in touch with Grey Space Advisory to explore the best superannuation strategies for your financial future!