We’ve all heard of it. But what the heck does it actually mean?
And more importantly, what does it mean for young working women?
In my experience salary sacrifice is for senior professionals. People better organised with a much higher earning potential and a more sophisticated view of personal finance.
But lo and behold, after some digging around, it turns out salary sacrifice isn’t really that complicated.
And what’s more, there’s some pretty good reasons to consider taking the plunge.
So let’s begin our 101. Salary sacrifice. What the heck is it?
Salary sacrifice basics
Put simply, salary sacrifice is when you use a portion of your pre-tax salary to provide a benefit of a similar value. Basically you “pay” for something before you’re hit with income tax.
The most common types of arrangements are for things like concessional contributions into superannuation and financing of work vehicles.
The main benefit? You can spend part of your wage BEFORE you’re hit with income tax.
To be clear, some salary sacrifice payments are still taxed. But usually at a much lower rate than regular income tax.
Take salary sacrificing into superannuation for example. You’re taxed at a flat rate of 15%. Which is pretty good considering most of us pay income tax at a rate of 32.5% to 45% of our income.
The bottom line is, salary sacrificing can put more money in your pocket.
How it works
Let’s say you and your employer agree to a salary sacrificing arrangement for x dollars of each paycheck.
Every time you’re paid, x dollars is siphoned off to “pay” for something else before income tax is applied to the rest of your paycheck.
For those of you like me who shudder at the thought of math, the Government’s MoneySmart website summed up the numbers in a pretty tidy example.
A woman named ‘Crystal’ earns $90,000 before tax and decides to salary sacrifice $10,000 of her pay into concessional superannuation contributions.
Ordinarily she would pay $3,450 in tax on that $10,000 but now that she is salary sacrificing she will only pay $1,500 in tax on that $10,000 portion.
Crystal’s taxable income has also dropped to $80,000. So in turn she pays less in income tax (and also less on her Medicare levy surcharge which is calculated on how much you earn).
In this scenario Crystal’s take home pay will drop by $6,550. But she will have an extra $8,500 in her super and therefore she will save $1,950 in tax on income and super.
That means more money in Crystal’s pocket (in this case her superannuation account), and less money paid out in tax. If that’s still a little confusing, you can see a full break down of Crystal’s scenario here.
What salary sacrifice means for women
There’s a lot to be said for young women using salary sacrifice to bump up their super.
In my previous post Why women have less superannuation, we explore the gender gap in Australian superannuation and why women tend to have less money in their super.
A quick recap. The superannuation gender gap exists for two key reasons.
Firstly, on average Australian women earn 15.3% less than men.
Secondly, Australian women are usually the primary caregiver in their household which can mean interruptions to working life.
Many women go years without a contribution into their super fund.
Even if you return to work, you may have “missed out on” months or even years of super contributions from your employer.
The reason salary sacrifice can help offset the super gender gap is by ensuring extra money is diverted into super while you’re working full time.
Salary sacrifice can’t fight Australia’s pay gap. But it CAN help you beef up your super balance before you leave the workforce (if that’s something you choose to do).
There are a number of other ways to help bridge this super gap. Research your options in this post.
What to be careful of
Benefits aside, you should do some serious thinking before signing up to salary sacrifice.
Using super as the example, making additional payments while you’re young sounds great. But there’s a few things to keep in mind.
Firstly, you can only access your superannuation after you reach “preservation age”. It’s currently set at 60 for people who have retired and 65 for people who are still working.
There are a few exceptions but basically your superannuation money is locked up for decades.
Secondly, the money in your super account is at the mercy of the market. Investments can both grow and shrink. And don’t forget that many super funds come with all sorts of hidden fees.
Want an extreme example of how the market can affect your super? Google how many people were left with decimated superannuation balances after the global financial crisis…
If you ARE considering additional payments into super learn as much as you can about your fund. Get comfortable with how your money is being invested and the different types of fees you’re being charged. And if you’re not happy, try another fund!
Last piece of advice! If you have a HECS-HELP loan with the Federal Government, your loan repayments are calculated on your total income.
However, if you choose to salary sacrifice, your employer will calculate your repayments on your net income at the same time as they process your income tax.
Your net income is the amount you are paid AFTER your salary sacrificed portion is siphoned off.
This means you will still owe money on your HECS-HELP loan at the end of the financial year and are likely to receive a tax bill from the government.
You can choose to pay this remaining tax at the end of the year when you receive your bill. Or, you can ask your employer to make extra tax payments every pay check to cover the short fall.
What to do
Have a really good think about what’s right for you. Weigh up the pros and cons of salary sacrifice and consider what it means to your individual circumstances.
Salary sacrifice isn’t offered by all businesses however it IS becoming more and more common. Chances are if you work for a sizeable business salary sacrifice will probably be available.
If you DO want to salary sacrifice, talk to your payroll team! And if you don’t have a payroll department, grab your manager or HR rep.
Ask them about their salary sacrifice options. And make sure they calculate their employer super contributions based on your total salary! (Not your net salary – which is what’s left over after you deduct the amount you want to sacrifice).
Salary sacrifice is another tool in your financial tool belt. And whether you choose to salary sacrifice or not, it’s good to be educated on the options available to you.
Until next time,