You’re excited because you’re finally hitting the salary goal you’ve worked hard for. Your boss gave you a raise, and you feel good about the job you do and your compensation matches that enthusiasm. However, a bigger paycheck means that more taxes will be potentially taken out. Here are a few things you can do to lessen the financial burden of receiving a raise.
1. Reduce taxable income by sacrificing salary
The first thing you can do to minimize taxes is to simply not take as much of your salary home for the year. This doesn’t mean refusing a raise for your hard work. It does mean you can choose to allocate some or all of that raise toward something else. In doing so, you avoid taxation. Some common purchases made with salary sacrificing are cars, superannuation, housing costs, and fringe benefits. Fringe benefits are equivalent to employee benefits, and they are usually taxed by the Fringe Benefit Tax which is paid for by the employer. These benefits might include health insurance, paid vacation time, medical leave, or even something as particular as paying for gym memberships. However, this is something that you as an employee must discuss with your employer, and it’s important to note that there are no income limits on the amount of salary sacrificing you can do, but there can be limits on the specific types of benefits. If you have particular questions about what will and will not count as salary sacrificing, it’s worthwhile to reach out to a tax agent.
2. Contribute super
Super or superannuation is a form of a retirement plan for Australians. By contributing a large portion of your new raise to your superannuation fund, you can save yourself quite a bit of money for that taxable year. It is also an option to use some of your salary for your legal partner’s super fund. Data reports show that if someone who receives a $5,000 raise puts all of their $5,000 into their super instead of adding it to their gross income, they can keep more of their wealth than if they take it as total gross income, thus paying a higher total tax rate. Something to note about supers: You can’t use the money you put into it immediately. It is only accessible at retirement age which is currently an average of 66 years old.
3. Get private health insurance to avoid the medical levy surcharge
In Australia, there is a medicare levy surcharge which requires those who make more than $90,000 if filing as single, or $180,000 as a married couple to pay an additional tax. If you make this amount and you do not own private health insurance, you must pay this particular surcharge. The medical levy surcharge runs a flat rate of 1% to 1.5% tax on total income. To see what your pay rise might mean for you, use the medicare levy surcharge calculator at iSelect where they offer a medicare surcharge calculator. This calculator can determine which tax rate you may face.
The conclusion is that if the percentage of what you pay for the Medicare levy surcharge exceeds the cost of private health insurance, it will save you money to just purchase private health insurance. This way, you are exempt from paying the Medicare levy tax. If you fall into this category and you’re searching for private insurance providers and the details of their cover policies, be sure to check out iSelect for help.
Conclusion
As tax season comes barreling forward, it’s crucial to remember the various options that are available to you. By utilizing these tools and ideas, you will lessen your tax payments, allowing you to keep more of your hard-earned money in your pocket.
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