The new ‘income tax cuts for all’ are now in full operation, and most welcome. However they do have a small downside. For most people tax deductions are now worth less. Deductions that previously saved 34.5 cents of tax per dollar now only save 32 cents. Those previously worth 21 cents are now only worth 18.

Superannuation salary sacrifice is one of the commonly used deduction strategies that will now be of less benefit. Some may ask if it is still worth doing.

When a worker arranges to sacrifice some of their pay into super it goes into the account from the person’s pre-tax pay. Income tax is not deducted first. However superannuation entry tax of 15 per cent is payable.

So a person in the 32 per cent tax bracket, including Medicare Levy, saves 17 per cent. Someone paying 39 per cent tax saves 24 cents per dollar, and a person in the top tax bracket of 47 per cent saves 32 cents per dollar.

However people in the lowest tax bracket now only pay 18 per cent tax, not 21 as in the past. Deduct 15 cents entry tax and they only save 3 cents per dollar, not a great benefit.

If the person’s income is below the Medicare levy threshold or makes them eligible for the Low Income Super Tax Offset the situation is more complex and advice may be needed.

So anyone in the second tax bracket or higher, that is, earning $45,000 per annum or more, will still gain attractive tax savings by sacrificing part of their salary into super.  

Tax saving is one benefit of salary sacrificing. The other big benefit is building extra retirement savings. Small amounts contributed regularly over a long period grow surprisingly due to compound interest.

Early in a new financial year is a good time to start a salary sacrifice plan. The maximum super contribution including employer SG amounts is $30,000 per annum. Starting early in the year makes reaching that easier. The extra amount up to the limit can be spread over the longest period.

Some people may think they can’t afford to put extra into super. It’s important to realise that $100 sacrificed doesn’t reduce after-tax pay by $100. It will only cost $68, or $61, or $53 depending on their tax bracket.

Sacrificing is less painful than people think. Money deducted from pre-tax pay will hardly be missed. Any small stress initially will fade as spending adjusts to the income available to it.

Regular super contributions for a long time will make a big difference to retirement savings as they grow with compounding interest. This will mean a better living standard in retirement. See the pay office today and arrange a sacrifice plan.