Superannuation grows through a combined effect of investment earnings and voluntary contributions. Your super sum is invested in assets and shares, and your sum grows with the equity. The money that you or your employer add to your super boosts the equity. When you make contributions to your super, any little bit counts because $100 that you add today is transformed through investment growth into a larger sum tomorrow, next week and up until you’re ready to retire and you can begin to access your superannuation.
Beefing up your super can set you up for a more financially free and confident retirement – that’s clear. But how do you grow your super faster and maximise your potential retirement savings?
Most financial planners agree that there are two optimal ways to start growing your super as a young Australian: salary sacrificing and making voluntary super contributions. Below, we’ll break down the difference between salary sacrificing and personal superannuation contributions, helping you boost your financial literacy and start planning for a financially free retirement.
Salary sacrificing
As an employee, you may be able to make an agreement with your employer to transfer some of your gross income directly into your superannuation fund. This is called salary sacrificing or salary packaging. Salary sacrificing arrangements allow you to receive a lower salary and take-home pay in place of super contributions that will sit in your super fund and grow exponentially until retirement. However, it’s not only this delayed gratification of optimising your investments that makes salary sacrificing such a high-value financial strategy. By salary packaging a portion of your gross wage, your taxable income is lower, and you will be charged lower amounts in tax. The portion of your income that is sacrificed to super becomes a concessional contribution, and these are taxed at only 15%, which is, more often than not, a lot less than an employee’s income tax rate. Like with everything tax-related, there are caveats to these general figures, like salary sacrifice caps that charge you extra tax as you exceed the concessional contribution cap. So, superannuation financial advice for doctors, dentists, surgeons and other high-income earners would be different to middle and low-income earners.Does salary sacrificing affect your employer’s legislated super guarantee?
No. Your employer is still mandated to pay an additional 11.5% of your income into your superannuation contributions. When you make a salary sacrifice contribution, it comes from your earnings, not the employer’s pocket. You can make additional contributions without it affecting its standard growth, and then you will see it grow even stronger and faster.Salary sacrifice in action
Let’s consider a case study to see salary sacrificing in action. Remi is 35 years old and lives comfortably within her means while on a salary of $80,000 a year before tax. She opts to sacrifice $200 a month from her salary to her super. Before tax, Remi earns $6,666 a month, $200 of which goes to her super, so her taxable income amount is now $6,466 a month. On this amount, she will pay $1,436 in tax and take home a total of $5,030 a month, instead of $1,505 in tax and $5,161 net income without salary sacrificing.|  | Gross Salary/Month | Income Tax/Month | Take Home Pay/Month | The after-taxed $200 |
|---|---|---|---|---|
| Salary Sacrifice | $6466 | $1436 | $5030 | $170 |
| Standard | $6666 | $1505 | $5161 | $139 |
| Difference | -$200 | -$69 | -$131 | + $39 |
The $200 salary sacrificed is taxed at 15%, which makes the final amount entering super $170. As Remi only loses $131 in her take-home pay, this makes her $39 better off by salary sacrificing $200 a month. If she wanted to invest the $200 in her gross salary in shares or store it in savings herself, she would actually only have $139 to use.
If Remi has an average super fund sum for a woman her age before she begins salary sacrificing, she will have about $72,000. When she retires at 67, Remi will have an extra $98,058 at retirement, and will have saved $24,576 in tax reductions over her working life.
| Â | Standard | Salary Sacrifice | Â |
|---|---|---|---|
| Extra Super Contributions/Month | 0 | 200 | Â |
| Total Extra Super Contributions | 0 | $76,800 | Â |
| Superannuation at retirement | $533,753 | $631,811 | +$98,058 |
The total benefit from salary sacrificing = $98,058 + $24,576 = $122,634
Using salary sacrificing to enter lower income tax brackets
Salary sacrificing becomes even more lucrative when a salary sacrifice drops your taxable income into a lower tax threshold. This won’t apply to Remi because her nearest income tax threshold is $45,000, and it’s unlikely she could sacrifice that much salary while still living comfortably. But for someone who is on $47,000 a year and could sacrifice $200 a month, they could move into a lower tax bracket and save more money on income tax each year.
For anyone who earns over $45,000 a year, making concessional contributions is still generally a tax-effective way to contribute to your superannuation. For higher income earners, note that there is a cap of $30,000 in salary sacrifice contributions per year. If you fall into this category, you could benefit from speaking with an accountant in Melbourne, Sydney, Brisbane or wherever you’re located to help find an alternative solution.
Remember, though, anything you can add will grow, so if things are tight, or maybe you’re budgeting for an apartment or house, you don’t need to add large sums to your super for the payoff to be effective.
Voluntary super contributions
Voluntary or personal contributions into your super refer to when workers use their after-tax pay to directly add to their super fund. In contrast to salary sacrifice contributions, personal contributions are non-concessional, and they’re not further taxed.
Tax-deductible contributions
From the outset, voluntary super contributions seem like a less beneficial approach because the money has already been taxed at an income tax rate, which is between 16% to 30%, depending on your salary. But importantly, you might be able to claim a tax deduction for after-tax super contributions, in which case, this would work out to be similar to salary sacrifice contributions, as it would reduce your taxable income by the amount of the contribution.
There are restrictions and eligibility requirements to meet in order to claim a tax deduction on your personal super contributions, like fund requirements, submission and acceptance of a notice and age requirements. Like with salary sacrificing, your super contributions will be taxed at 15%, so if you were to add $200 a month in personal contributions, only $170 will go into your super.
Government co-contributions
If you’re earning under $60,400 a year before tax, when you make voluntary super contributions, the government may chip in up to 50% more. This is a great way of boosting your super, and getting free government co-contributions that will compound over time and result in a higher amount when retirement comes.
Voluntary super contributions in action
If Remi decided not to practice salary sacrificing, she could instead take her full net salary and then make the same voluntary super contributions. In this case, she would need to give her superfund a notice of intent and have it acknowledged by them. She would then pay $200 directly into the fund and file for the total $2,400 tax deduction when lodging her tax return.
The fund will have to pay the ATO 15% of the contribution, so only $170 per month will go into her super. As with salary sacrificing, she is better off with this 15% tax on her contribution than the 16% to 30% income tax on the money. Similarly to her salary sacrifice position, Remi would have $98,058 more money in her superannuation nest egg when it comes time for her retirement, and she would save $24,576.
Salary sacrificing vs voluntary contribution
So, Remi would end up with the same financial benefit in both scenarios, so what’s the difference? This is one of the more common questions for our financial planners. Salary sacrificing is much simpler and requires a lot less admin work. However, it requires you to come to an agreement with your employer, who may reject the conditions. If your agreement is met, you can set and forget your sacrifice and get used to your new take-home pay, while your super grows much stronger in the background.
If a dedicated, consistent sacrifice seems too constraining to you, voluntary super contributions allow you to take home more of your pay and contribute the money yourself. This means that if you do need a financial buffer in case the notorious rainy day comes along, you will have direct access to your own money before contributing. This can work great for people with dependents, like single mums. And, if not, you can send the money to your super refund and let it grow. The challenges with voluntary contributions are the dedication and consistency required to maintain your contributions, if reaching the same level of superannuation payoff is your goal.
While voluntary contributions give you full access to your money until you make the contribution, you won’t get the income back from your tax return until the end of the financial year. Not having immediate access to the tax amount you pay on the total $2,400 of contributions you make throughout the year is a disadvantage for wealth generation. If you’re planning on investing your spare money, it means your money has less time to grow. If you’ve been dependent on your partner’s income and are planning financially for a divorce, personal superannuation contributions can be a great option to protect your finances come retirement.
Review your approach to super regularly for the best retirement possible
Both salary sacrificing and voluntary super contributions are powerful tools to grow your retirement savings, and each has its own advantages depending on your personal financial habits and flexibility needs. Salary sacrificing offers a streamlined, tax-effective set-and-forget strategy, reducing your taxable income and boosting your super consistently with minimal effort.
On the other hand, voluntary contributions give you more control and liquidity, allowing you to contribute on your own terms, especially if you need access to your full income in the short term. For those who cannot arrange a salary sacrifice with their employer, you might be relieved to know they work out the same for your net pay, but you won’t get your income tax money back until the end of the financial year.
Working out how much you need to retire at 65, 67 or whenever you plan on hanging up the boots can help strengthen your goals and motivate you to plan accordingly. Ultimately, the best option comes down to your individual circumstances, discipline and financial goals. Whether you choose to automate your contributions through salary sacrifice or prefer the flexibility of voluntary top-ups, the key is consistency.
You can check and review your super through the government’s super health check. Or if you want to learn more about whether salary sacrificing or super contributions are the best option for you, then we highly recommend you consult with your local financial planners.
Here at Best Financial Planners, we’ve found that a lack of resources and knowledge is one of the biggest barriers to proactive retirement planning. We’re committed to helping Australians make smarter financial choices, not just through advice and guidance, but through education.
Whether you’re looking to connect with a financial planner in your city or even learn more about any of the hints and tips we’ve shared here or across our website, simply get in touch with one of the team members at Best Financial Planners, and we’d be glad to help you find the solution for you.
