Who doesn’t want to make the most out of their hard-earned income and see more of it in their pocket or in their super fund? As experts in the field, we’re here to talk through options and set up tailor-made strategies for our clients that will make their goals attainable.
At Strategic Invest Blue, that’s what motivates us most – celebrating the wins of our clients.
Salary sacrificing and salary packaging are two options that present financial planners with the opportunity to help their clients reduce their taxable income. In the case of salary sacrifice, it can be an extremely effective strategy to boost retirement savings whilst salary packaging can result in additional income being paid into your bank account regularly (i.e. fortnightly).
Salary sacrifice is when your employer withholds income from your pre-tax salary and instead of it being paid to you as part of your regular income, it goes into your superannuation fund.
John wants to start boosting his retirement savings and decides to start salary sacrificing $10,000 a year from his pre-tax salary. John is on a salary of $90,000 plus super.
|Without salary sacrificing||With salary sacrificing|
|Take home pay||$69,983||$63,433|
|Tax In super (15%)||$1,350||$2,850|
*This table is reflective of one financial year
Through salary sacrificing, John will save $3,150 on income tax whilst his take-home pay will only reduce by $6,550. He will still receive his usual 10% employer contribution plus his salary sacrificed contributions. John’s super will increase by $8,500 for the financial year meaning that he is $1,950 better off overall.
You need to seek advice from a professional to determine if salary sacrifice is right for you. An expert will take into account your circumstances and provide advice if there are advantages to be had.
Again, seeking professional advice is advisable on this one as it’s important that your finances are assessed holistically. A financial planner can help you work out how much extra salary you should set aside.
Salary sacrifice needs to be arranged through your employer, but a financial planner can help you with the relevant information required.
Something to consider with salary sacrifice is that once the money you’ve set aside or ‘sacrificed’ is sitting in your superannuation fund, it cannot be accessed until a condition of release is met. In most cases, this is when you retire or when you turn 65.
This makes it a very effective strategy for people close to retirement or for those with income not needed for the foreseeable future but less appealing to those for whom retirement is still a long way off.
Salary packaging is similar to salary sacrifice in that your pre-tax income is used to cover certain expenses. Both strategies are effective in reducing the amount of tax you pay however, there is one fundamental difference.
The benefit of salary packaging (verse salary sacrifice) is that you can access funds immediately. This makes it a strategy with broad appeal given that many of us are in the midst of busy careers and raising families. Retirement seems a lifetime away. The question often pondered is, ‘Why wait when we can potentially access extra income now?’
Some sectors offer salary packaging as part of their employment and in most cases, salary packaging can be a significant benefit to employees and should be taken advantage of.
Those in healthcare or working for a non-for-profit can elect to receive a portion of their income to cover expenses. These might include smaller, everyday costs such as meals or leisure/entertainment expenditure or it may be used toward more significant spending such as car or mortgage repayments.
For example, employees of not-for-profit organizations can package up to $15,900 per annum whilst healthcare employees can package up to $9,010. This money is essentially an employee’s tax-free income and can be used for most things with the exception of cash withdrawals.
If someone working as a nurse earned $90,000 their marginal tax rate would be 34%, so they would pay $3,063 tax on earnings of $9,010. If they elected to salary package this instead, they wouldn’t pay any tax and would be able to use the whole $9,010 towards expenses.
Salary packaging is available to employees in industries beyond the healthcare and not-for-profit sectors. It is simply a question of whether an employer offers it. However, if not currently offered, employees can ask their employer to establish an arrangement by which they (the employee) can salary package.
Salary packaging in industries beyond those already outlined may involve your pre-tax income being used to pay for purchases such as a new car (this is sometimes known as a ‘novated lease’) or on items used in the workplace such as laptops.
Whilst the overall benefits are not as significant as for those in the healthcare or not-for-profit sectors, should your employer offer salary packaging it is certainly worth considering, particularly for something like a car purchase as it may work out to be more cost-effective than a car loan or redraw on a mortgage.
Whether it be to discuss the strategies outlined here or for guidance on other financial matters, we’re here to help. We provide expert, tailored advice to people at the many different stages of life’s journey be it first home buyers, young families, empty nesters or those nearing retirement. We see the opportunity to guide clients on their path to financial freedom as a privilege and we look forward to being of assistance. Please contact us for a complimentary consultation.
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Connect with Simon Ashman on LinkedIn
About Simon Ashman
Simon Ashman is Tassie born and bred and has been with Strategic Invest Blue since 2008. He brings a dynamic approach to his work and relishes the opportunity to learn what his clients most want for themselves and for their loved ones. As dad to daughters Lucy (5) and Margot (3), Simon understands that it is often a question of balancing what to set aside for those long-term dreams whilst still having enough time and money to enjoy the precious here and now with a growing family.
Book a chat with us if you would like to speak with Simon Ashman or one of our other financial planners about your own situation.
What you need to know
This information is provided by Invest Blue Limited (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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