Salary sacrifice and how this can equate to FREE MONEY for you, which you know I love!
As you’d be aware, your employer makes super contributions on your behalf. This money is taxed at a flat rate of 15% when it goes into your super fund. This means if they put $1,000 into your super fund, $150 is paid in tax.
How much goes to tax
Now, if you are earning anything over $37,000 then your marginal tax rate (that is, the amount of tax you pay on every dollar you earn over and above $37K) is between 34% and 46.5% including the medicare levy.
That means that for each $1,000 you earn, between $340 and $465 is going to the tax man.
Pay less tax
If you choose to salary sacrifice a portion of your income into your superannuation, instead of receiving into your bank account, you will only pay 15% tax on that money. Makes sense?
So, let’s say your earn $70,000 and you decide to salary sacrifice each year $1,000. You will receive $69,000 over the year and $1,000 will go into your super fund.
And… instead of paying $340 in tax on that $1,000 you’ll only pay $150.
This basically means you recouped $190 in additional funds which have been put toward your long-term retirement savings.
The other benefit
The other benefit of salary sacrificing into super is of course that you will increase your ultimate retirement savings balance. I did a quick calculation, just to demonstrate the power of a little now, over a long time.
If you salary sacrifice just $1,000 a year, (ok that’s less than $20 a week) from the age of 25, you’ll increase your end super balance by over $75,000. That’s a lot of money later, for a very little sacrifice now.
Basically, you’ll be benefiting from the positive effects of compound interest, investing over the long term, and FREE MONEY through paying less tax all along the way.
I’m a big fan of this, and do it myself each year, like everything I talk about at Get Rich Slow, it’s all stuff I do myself and have been doing for many years.
It’s probably important that I mention the limit on salary sacrifice too, each year you can contribute up to $25,000 to your super in this way, but that includes the amount your employer puts in.
So if you want to contribute up to the limit – which is what I do – you’ll need to work out what your employer puts in each year, and subtract this figure from $25K.