If you’re an employee, you may have the opportunity to set up a salary sacrifice strategy with your employer – allowing you to put some of your before-tax income straight into super.
The main benefit of this is that your salary sacrifice contributions are taxed at only 15% inside your super fund, compared to your marginal tax rate outside super. The biggest downside of this strategy is that the sacrificed portion of your income reduces the amount of money you can put towards paying off your debts, which may increase the amount you are spending on interest each year.
So which is the better use of your money, paying off the mortgage or salary sacrificing into super? Let’s look at some of the things you need to consider.
What is your marginal tax rate?
People on higher incomes have more to gain from salary sacrifice strategies than those on lower incomes, as demonstrated in the following table:
| Taxable income | Marginal tax rate (including Medicare levy of 1.5%) | Potential tax savings from salary sacrifice |
|---|---|---|
|
0-$18,200 |
0% |
0% |
|
$18,201-$37,000 |
20.5% |
5.5% |
|
$37,001-$80,000 |
34% |
19% |
|
$80,001-$180,000 |
38.5% |
23.5% |
|
$180,001 and over |
46.5% |
31.5% |
By contrast, the savings from paying off your home loan are based only on your home loan interest rate (currently about 5-6%p.a. for a typical variable rate home loan), not what you earn. For higher income earners, that generally tips the scales in favour of salary sacrificing. However, there are other important factors to consider.
Do you have room in your concessional contributions cap?
Your concessional contributions cap is the limit on how much you are eligible to contribute to super each financial year while accessing the tax concessions described above.
In 2013/14, the cap is $35,000 for people aged 60 and above and $25,000 for everyone else. From 2014/15, the higher cap will apply to anyone aged 50 and above. If you exceed these caps, your excess contributions will be taxed at your marginal tax rate, plus an interest charge.
One thing to be careful of is how much your employer pays you in Superannuation Guarantee (SG) contributions, as these contributions are included in your concessional contributions cap. For example, if you earn $100,000 p.a., your employer contributes a minimum of $9,250 p.a. to your super. That means you only have $15,750 in your cap if you are under age 60.
Will you need access to your money?
While the tax savings from super may be attractive, you need to consider whether you might need access to this money before you retire (including in emergencies), as you generally can’t start accessing your superannuation until at least age 55.
By contrast, putting your surplus cash flow into your home loan can save you interest without compromising access to your money – provided your home loan has a redraw facility or offset account.
What’s best for you?
As you can see, there’s no ‘one-size-fits-all’ approach to answering this question, and you may wish to adopt both strategies to varying degrees. The best way to ensure you’re using your surplus income in the smartest way is to talk to us.
