How can extra super savings reduce your tax?

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How super can save you even more

By now you’ve probably got the message that the Government really wants you to save for retirement. After all, they set up the superannuation guarantee giving your employer a legal responsibility to make payments into your super fund for every dollar you earn. 

But that’s not all the Government has done to help you get even more money into super and get it working harder for you. They’ve also packaged super up with some pretty fantastic tax incentives to make it an even more appealing as a way to save, invest and pay less tax in the process.

Tax on your money in super

When you save or invest money outside of super, earnings on that money counts as income in your annual tax return. That means you pay tax on these earnings like you do with your salary. So if the highest rate of tax you’re paying is 34.5% – we call this your marginal tax rate – that’s how much tax you’ll be paying on your bank account interest or investment returns. 

When your super savings earn income, you pay tax on this at a rate of 15%, regardless of how much your annual income is. So if your marginal tax rate is 34.5%, you’re paying 19.5% less tax on the investment income your super earns compared with your savings and investments outside of super. So that’s more money that stays in super rather than going to the ATO, earning a return and growing steadily with each year that passes.

Tax on your extra savings into super

It’s tax breaks like these that can also work in your favour when you save into super from your own pocket. When you make a payment into super from your before income, that money is taxed at only 15%. So if you’re paying a marginal rate of tax that’s higher than 15% – say 34.5% or even 47% if your income is well into six figures – then you’ll be paying less tax on that chunk of income you’ve just saved into super.

While saving money into super means slightly less money to spend now, the lower tax rate means you’re getting more of your salary to invest in super.

One of the easiest ways to make extra savings into your super and get the immediate benefit in your cash flow is to set up a salary sacrifice arrangement with your employer. Just ask your payroll team to make a regular direct payment from your before-tax salary into your super fund – they might need you to fill in an online or paper form to get this all set up for you. 

The amount you decide to save is completely up to you and you can stop making these payments whenever you like. Even an extra $10 or $20 each month can make a difference to your balance.

Things you should know – concessional contributions cap

While more saving into super is definitely a good thing to do, there are limits on how much you can save and still reduce your tax. In any financial year, you can make before-tax payments (also called concessional contributions) up to $27,500 in total. This includes the super guarantee and salary sacrifice payments your employer is making on your behalf, plus any extra payments from you that you claim a deduction for, or your employer such as payments for some insurance policies.

If your payments into super have been under the concessional contributions cap in the past (the limit went up from $25,000 to $27,500 from 1 July 2021) you may be able to make extra payments on top of this $27,500. This is called the carry-forward of unused concessional contributions but there are conditions on accessing this unused cap.

That’s a lot of numbers to try and figure out and you probably don’t remember how much super you paid last year or the year before that. For an easy way to find out how much extra super you can contribute in this financial year you can visit MyGov and go to ATO online services to check on your unused concessional contributions cap.

Salary sacrifice and save

Throwing around percentages and marginal tax rates can make it hard to get a grip on just what sort of tax savings you can expect when you salary sacrifice into super. The infographic below compares potential tax savings between receiving a salary versus salary sacrificing into super. For example, if you earned $100,000 and contributed $10,000 into super, you could save up to $2,400 in annual tax. And, depending on your salary and tax rate, the benefit could be even greater, with a potential savings of 32 cents on every dollar for those on the highest marginal tax bracket of 47% and 17 cents on every dollar for people earning over $250,000.