If you’re an employer, you (hopefully) already know that superannuation is paid to casual, part time and fulltime employees by their employer. The amount paid is based on the super guarantee rate, which from 1 July 2023 will be 11% of ordinary earnings (an increase from 10.5%). Super isn’t usually paid on non-ordinary earnings, like overtime or expenses.
Now that we’ve got our super refresher out of the way, it’s time to dive into super salary sacrificing.
What is salary sacrificing?
Salary sacrificing is when an employee allocates a portion of their pre-tax ordinary earnings to a specific expense, e.g car leasing (AKA novated leases), mortgage or rent payments or a pre-paid debit card for meals. What an employee can salary sacrifice is heavily dependent on their industry, award or enterprise agreement. You can learn more about salary sacrificing in general here.
The benefits of salary sacrificing
The benefit of salary sacrificing is that it reduces an employee’s taxable income. For example, if an employee earns $100k per annum and they sacrifice $10k of their pre-tax earnings, their taxable income would be $90k. Based on the 2022/2023 tax brackets, the employee would pay $3,250 less in income tax.
While novated leases and pre-paid debit cards are only available to specific industries, awards or enterprise agreements, any employee already being paid superannuation can request salary sacrificing super (also known as voluntary contributions). It’s then up to the employer whether or not they can accommodate it.
Should employers accommodate salary sacrificing super?
In an ideal world, yes. While smaller employers may not have the resources to provide this to their employees, most payroll platforms can easily support salary sacrificing super. Employment Hero Payroll for example makes it incredibly easy. But while most employers can, let’s cover why you should.
Reducing taxable income
We’ve already covered the obvious; salary sacrificing reduces your employees’ taxable income. The taxman still takes a cut of voluntary contributions, but the tax rate is reduced. Instead of an employee paying income tax via PAYG on the salary sacrificed portion of their earnings, salary sacrificing super is taxed at 15% for the first $27,500 of voluntary contributions in a financial year. Once the $27,500 cap is reached, voluntary contributions revert to the employee’s marginal tax rate.
So for example, let’s say an employee’s (Alex) marginal income tax rate is 37%. If Alex wanted to salary sacrifice $1,000 per month ($12,000 per year) to their super, this would be taxed at 15% rather than 37%. As this doesn’t exceed the annual cap, Alex will save $2,640 in taxes by voluntarily contributing the $12,000 to their superannuation, instead of including it in their take home salary.
Speaking of tax rates, employees earning less than $18,200 per annum don’t pay income tax, so voluntary contributions (taxed at 15%) probably aren’t in their best interests. The next tax bracket ($18,200 to $45,000) up is taxed at 19%. Depending on the specific employee’s financial plans, salary sacrificing super may not be in their best interest either.
The gender pay gap
Not only does salary sacrificing super reduce your employees’ taxable income while simultaneously growing their retirement fund, it’s also another way that employers can reduce the gender pay gap.
The gender pay gap is multifaceted, and superannuation is a big part of it. According to Australia Institute’s Centre for Future Work latest report, female-dominated professions earn less than male-dominated professions. Women are also more likely to take parental leave, during which they’re not entitled to superannuation (though some employers choose to pay it). Another report from UNSW found that women are more likely to work part-time or be under-employed to accommodate unpaid work like caring for elderly parents.
As a result, women contribute less to their superannuation over time, with the Future of Work report finding that women retire with $136,000 less in superannuation than men. Salary sacrificing super is one way that employers can help narrow the gender pay gap.
Things to consider
Salary sacrificing super isn’t for everyone (we’ve already touched on lower-income earners above).
Salary sacrificing reduces an employee’s take home pay and unlike other salary sacrifices, salary sacrificing super cannot be accessed easily (more details here). Employees can use MoneySmart’s salary sacrificing super calculator to ensure their voluntary contributions fit their budget. The lower tax rate also only applies up to $27,500 a year. Contributions above that will be taxed at the marginal tax rate and penalties may apply.
At the end of the day, it’s up to individual employees to decide if voluntary contributions are in their best interest, and if so, how much they should contribute.
Salary sacrificing super via Swag
Users of Swag by Employment Hero can request voluntary contributions directly from the app. Payroll admins will receive an email notification of the request, and can set up a regular deduction in less time than it takes to make a cup of tea (go on, we’ll time you).
Are you a Swag user and want to know more? Check out our how-to article and FAQs now.
The information in this article is current as at 8 June 2023, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero) for its Swag brand. The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.
