Getting on top of your super to add some extra padding to your retirement savings? Good on you! Your super for a more comfortable retirement. One of those strategies is to contribute extra to your super, either from your pre-tax or after-tax income.
For this article, we’ll focus on the contributions you can pay from your pre-tax income. Specifically, we’ll give you the need-to-know information to help you figure out how much super to pay from your pre-tax income.
Super contributions from pre-tax income
Let’s start by addressing the technical terms that pop up from your search on contributing to super from your pre-tax income. Do terms like “concessional contributions”, “super guarantee” and “salary sacrifice” sound familiar? Well, if you’ve been doing your research, they should! If you've never heard them, though, don't worry – we're here to cover them.
Concessional contributions are the amounts paid into your super account from your pre-tax income. This includes employer contributions, salary sacrifice, and spouse contributions. The Australia Taxation Office (ATO) website also lists other contribution amounts that can fall into this category.
We now know that employer contributions are a type of concessional contribution. But there’s a specific type that's more common than others – super guarantee (SG) contributions. SG is a government mandated amount paid by your employer from your pre-tax income. This is the minimum amount your employer should pay into your super account. Maybe you’ve noticed this line item on your regular payslip.
The next type of pre-tax contribution we’ll cover is salary sacrifice contributions. To salary sacrifice means to make a voluntary payment to your super from your pre-tax income. This is something you can arrange with your employer. Once you do, the amounts will automatically be paid from your pre-tax income without further action from you.
Now we know the types of pre-tax contributions, why would people choose to contribute to super from their pre-tax income? Let’s look at that next.
Reasons people make pre-tax contributions
There’s a popular reason Australians make additional super contributions from their pre-tax income. Can you guess what it is? I’ll give you a hint: it’s all in the name (concessional contributions). This contribution type is given its name for a reason – they receive favourable tax treatment.
How? They’re generally taxed in your super fund at a lower rate of 15% Keep in mind that some higher income earners are likely to pay tax on their concessional contributions at a different rate.
Making salary sacrifice contributions is also a convenient way to contribute extra to super. As mentioned before, once your salary sacrifice arrangements are locked in you don’t need to give it another thought. On the other hand, making after-tax contributions requires regular action.
How much super to pay from pre-tax income
So, let’s say you’ve decided you want to make salary sacrifice contributions. What’s next? Figure out how much super you want to pay from your pre-tax income. This requires more than just pulling a number out of a hat.
You’ll need to gather some relevant figures and calculate the right amount for you. Those figures include your current age, target retirement age, existing super balance and SG contribution amounts. Also, consider your desired retirement lifestyle to determine how much income you’ll need to support that lifestyle. You can then plug those numbers into Pearler's Financial Independence Calculator. The calculator should help you figure out how much super to pay from your pre-tax income.
To learn more, read our article on how much super you should have to retire comfortably.
Limits on pre-tax super contributions
Once you’ve determined how much super to pay from your pre-tax income, don’t jump into setting up your salary sacrifice! Take a moment to consider the amount in light of the concessional contribution caps. That’s right, there are limits to the amount of pre-tax contributions you can make.
You’re currently allowed to make up to $30,000 each financial year. This limit changes every now and then based on indexation. Check the ATO website each financial year to ensure you’re up to date on the relevant amounts. For more on the contribution limits, check out our article on how much super you can contribute.
Other options to consider
Making contributions from your pre-tax income isn’t the only way you can grow your super to meet your retirement goals. As mentioned, after-tax contributions are another legitimate option. Plus, under the right circumstances, other options include accessing government co-contributions, funds from downsizing your home and spouse contributions.
The appropriate strategy varies from person to person. Take the time to consider your situation and do your research!
