Pay less tax and get more from your next pay rise or bonus
Usually when you get a pay rise or bonus the first thought many people have is more money to pay down the mortgage, more money for the next holiday or other purchases/spending that has been put off.
If you are not already maximising your concessional contributions (i.e. super guarantee employer contributions, salary sacrifice contributions and in some cases personal tax deductable contributions) to superannuation you should consider topping up your superannuation with part or all of the pay rise.
This would be through an arrangement with your employer to pay part or all of your bonuses and/or pay rise into your superannuation as a salary sacrifice contribution.
Where’s the magic in this fairly standard event you may ask, the best way to show this is in the following worked examples in which we have two people on different incomes paying different levels of income tax.
Joe is 35 years old and is on a salary of $50,000 p.a. and he is to receive a pay rise of $5,000.
Sandy is 45 years old and is on a salary of $90,000 p.a. and she is to receive a pay rise of $5,000.
As you can see, if you are earning income and paying taxes personally your overall wealth would generally increase when you salary sacrifice a pay rise to superannuation.
One down side of this is however, you do not get to access this wealth until you get to retirement age and cannot spend the money today. On the other hand the increased savings you get for retirement are going to help you meet your retirement goals.
The compounding effect of putting a little extra away each year for the next 20 to 30 years before retirement assuming on average there will be a positive return on your superannuation investments is very impressive when you project the numbers forward over such a long period. This difference can be the extra you need to allow the holidays in retirement, the expensive health care needs you may have and generally more choice due to increased wealth.
This is just a brief overview and there are many factors that should be managed and considered to ensure you do not exceed any contribution caps which will result in further tax and no savings. It cannot be stressed enough the importance of obtaining advice before entering into any transactions. This article is not intended to be advice that should be solely relied upon as it in no way considers your individual circumstances.
If you wish to discuss your own SMSF strategies, contact the specialist PKF Superannuation team in Newcastle on (02) 4962 2688 or in Sydney on (02) 8346 6000. Alternatively, click here to find the PKF experts nearest to you.