How Does Salary Sacrificing Into Super Work for Low Income Earners?

If you’re earning a modest income in Australia, you might think salary sacrificing into your superannuation isn’t worth considering. But the truth is, low income earners can actually benefit significantly from this strategy. Let’s break down exactly how salary sacrificing works and why it could be a smart move for your financial future.

What is Salary Sacrificing Into Super?

Salary sacrificing into superannuation means you agree with your employer to reduce your take-home pay by contributing extra money directly into your super fund. Instead of receiving this money as wages, it goes straight into your superannuation account before tax is applied.

The key advantage? These contributions are taxed at just 15% in the super fund, compared to the marginal tax rate you’d normally pay on your wages. For low income earners, this difference can be substantial.

For example, if you earn $35,000 per year, your marginal tax rate is 21% (plus Medicare levy). If you salary sacrifice $50 per week into super, the ATO only takes 15% tax from that contribution, rather than 21%.

Why Is Salary Sacrificing Particularly Beneficial for Low Income Earners?

Tax Savings

The primary benefit of salary sacrificing is the tax saving. When you earn between $18,201 and $45,000, you pay tax at the rate of 19%. Add the 2% Medicare levy, and your marginal tax rate is 21%. However, contributions to super are only taxed at 15%.

This 6% difference might not sound like much, but it compounds over time. On a $50 weekly contribution, you’d save approximately $156 per year in tax.

The Low Income Super Tax Offset (LISTO)

Here’s where low income earners get a real boost. If you earn less than $87,000 per year, you may be eligible for the Low Income Super Tax Offset (LISTO).

The LISTO reduces the tax paid on super contributions. If you earn under $37,000, you receive the maximum offset. The ATO will contribute up to $500 per financial year into your super account as a top-up. This is essentially free money from the government.

To access this benefit, you don’t need to do anything special—the ATO calculates it automatically when you lodge your tax return.

Getting Ahead on Compounding

Super contributions benefit from decades of compound growth. Even small additional contributions made in your 20s, 30s, or 40s can grow substantially by retirement. Starting early with salary sacrifice means your money has more time to work for you.

How Much Can You Salary Sacrifice?

The ATO sets limits on how much you can contribute to super each year. For the 2023-24 financial year, the concessional contribution cap is $27,500 per year. This includes both your employer’s compulsory superannuation contributions and any salary sacrifice contributions you make.

For most low income earners, reaching this cap isn’t realistic. Instead, you might consider sacrificing a modest amount that fits your budget—perhaps $20 to $100 per week.

To calculate how much you can afford, work out your monthly budget and identify areas where you can reduce spending. Even small amounts make a difference over time.

Practical Steps to Start Salary Sacrificing

Step 1: Check Your Super Fund’s Rules

Not all super funds accept salary sacrifice contributions, though most do. Contact your super fund directly or check their website to confirm they accept these contributions and understand any fees involved.

Step 2: Speak With Your Employer

Approach your HR or payroll department to request a salary sacrifice arrangement. You’ll need to provide written agreement between you and your employer. Your super fund can usually provide the necessary documentation.

Step 3: Set Up the Arrangement

Once approved, your employer will deduct the agreed amount from your gross pay before tax is calculated. This amount goes directly to your super fund each pay period.

Step 4: Review Annually

Check your super statements annually to ensure contributions are being received correctly and your fund is performing reasonably. You can adjust your salary sacrifice amount if your circumstances change.

What About Centrelink?

A common concern for low income earners is how salary sacrifice affects Centrelink payments. The good news: salary sacrifice contributions don’t count as income for Centrelink purposes in most cases.

Importantly, they’re disregarded when calculating your assets and income test for payments like JobKeeper or other support services. However, if you receive the Age Pension, super contributions might affect your eligibility once you reach retirement age.

If you receive Centrelink payments, it’s worth contacting Centrelink directly to understand how salary sacrifice might affect your specific situation.

Important Considerations for Low Income Earners

Ensure You Can Afford It

While salary sacrifice is beneficial long-term, you must be able to afford the reduced take-home pay. Don’t sacrifice so much that you struggle with daily expenses or accumulate debt.

Don’t Sacrifice Into Super If You’re In Debt

If you’re carrying high-interest credit card debt, it usually makes more sense to pay this down first rather than sacrifice into super. The guaranteed “return” from eliminating 20% interest debt is better than the long-term super gains.

Check Your Fund’s Performance

Before committing to salary sacrifice, review your super fund’s investment performance and fees. If your fund is underperforming or charging high fees, consider switching to a better-performing fund first.

Review Your Tax Return

Make sure you claim the LISTO when you lodge your tax return. If you’re eligible and don’t receive it, contact the ATO to ensure you get your entitlement.

Real-Life Example

Let’s look at Sarah, a low income earner in Australia:

• Annual salary: $32,000
• Weekly salary sacrifice: $50 ($2,600 per year)
• Tax saving: $156 per year (6% difference between 21% and 15% tax rates)
• LISTO benefit: Up to $500 per year (she’s under $37,000)
• Total annual benefit: Approximately $656
• Amount reaching her super: $2,600 + $500 LISTO = $3,100

Over 20 years, assuming 6% average returns, this modest $50 weekly sacrifice could grow to approximately $112,000. That’s a significant boost to her retirement savings.

When Salary Sacrificing Might Not Be Right for You

Salary sacrificing isn’t ideal if:

• You’re struggling to meet basic living expenses
• You’re carrying high-interest consumer debt
• You’re planning to access super early (which is generally only possible in hardship circumstances)
• Your super fund charges excessive fees
• You’re about to claim the Age Pension (it may affect your eligibility)

Conclusion

Salary sacrificing into super can be an excellent strategy for low income earners in Australia, particularly thanks to the tax savings and the Low Income Super Tax Offset. Even modest contributions can grow significantly over time through compound returns.

The key is to start small with an amount you can comfortably afford, ensure you’re not creating financial hardship, and take advantage of government benefits like the LISTO. By