If you’re considering making extra super contributions in order to boost your nest egg, it’s important to be mindful of any limitations and avoid being stung by hefty additional taxes.
It’s never too early to start planning for your retirement. In fact, the sooner you make positive changes to your superannuation, the greater chance you give yourself to retire comfortably.
While you may feel content with the knowledge that your employer is making compulsory contributions into your super fund account each quarter, even minor extra contributions can really add up over the years.
If you’re employed, earning at least $450 per month and are over the age of 18, you're eligible to receive super from your employer.
The minimum contribution amount that your employer is required to make, known as the super guarantee, is currently 9.5% of your gross salary. This is scheduled to progressively increase to 12% by July 2027.
In addition to your employer’s contribution, you may be entitled to make extra contributions yourself, in the form of one or both of the following:
- Pre-tax super contributions
- After-tax super contributions
Keep in mind, however, there are limits to how much you can contribute in both cases.
What are the super contribution limits?
Pre-tax super contributions
Pre-tax super contributions, also known as salary sacrifice, can be paid out of your pre-tax income by your employer, at your request.
These payments, along with your employer’s super guarantee, make up what is known as your concessional contributions.
Your concessional contributions have a limit of $25,000 in total per financial year, regardless of your age and super fund balance.
Concessional contributions are taxed at a rate of 15%, which in most cases will be lower than your marginal tax rate.
According to MoneySmart, making extra concessional contributions is generally tax effective if you earn more than $37,000 per annum.
If your concessional contributions total less than $25,000 in a financial year, you may have the opportunity to utilise the unused amount of the cap for up to five years, in the form of a carry-forward contribution.
For example, if your concessional contributions totalled $20,000 in 2018, you may be able to carry the remaining $5,000 forward so that your 2019 cap becomes $30,000. If you then only make pre-tax contributions totalling $25,000 in 2019, you can continue to carry that excess $5,000 forward for a total of up to five years.
Only those with a total super balance of less than $500,000 on 30 June of the financial year prior may be eligible.
After-tax super contributions
If you reach the concessional contribution cap, there’s also the option to make super contributions from your after-tax pay. These payments are known as non-concessional contributions, as you will have already paid tax on this money.
The amount of non-concessional contributions you can make each financial year is capped at $100,000, for those with super balances of less than $1.6 million. If your super balance is over $1.6 million, you are ineligible to make non-concessional contributions.
There may be carry-forward flexibility for non-concessional contributions as well, depending on your age and your super balance.
What happens if I have exceeded the super contribution caps?
If you fail to keep track of how much you have paid into your super account in the form of both concessional and non-concessional contributions each financial year, you run the risk of exceeding the limits.
And if you do find yourself in that position, you could face having the excess taxed by up to 94% in some cases.
The total amount of extra tax you may have to pay will typically depend on your age, which financial year your contributions relate to, and whether the contributions were concessional or non-concessional.
If the Australian Taxation Office (ATO) does find that you have exceeded the caps, you will be issued with a determination and offered two payment options for the tax owing:
- Use your savings
- Pay it with the funds from your super account
If you want to find out how much you have contributed to your super fund in order to prevent exceeding the limits, you can either contact your super fund directly or the ATO.
You can also view your remaining carry-forward cap balance using ATO online services via myGov.