Superannuation Tips for Self-employed Tradies

For self-employed people, the decision to contribute to super is optional, unlike for employees where contributions are mandatory. Understanding the complexities of superannuation, including how to leverage tax benefits and plan your contributions effectively, is essential for cash flow management and tax planning, as well as retirement planning.

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We cover tips on how to make the most of your superannuation as a self-employed tradie, including planning your contributions, and the importance of seeking professional advice to ensure you’re remaining compliant.

What is superannuation?

Superannuation in Australia, commonly referred to as "super," is a system designed to help people save for retirement. For employers, they must make compulsory contributions into a superannuation fund on behalf of their employees. But for self-employed people, the choice as to whether they pay themselves super is left up to them. 

Compulsory Contributions

Employers are required by law to contribute a percentage of an employee's ordinary time earnings into a superannuation fund. As of July 2024, the Superannuation Guarantee (SG) rate is 11.5%. For sole traders, they decide if they pay themselves super. 

Tax Benefits

Superannuation contributions and earnings within the super fund benefit from concessional tax rates. Concessional (pre-tax) contributions are typically taxed at 15%, which is lower than most individuals’ marginal tax rates. Contributing to super with pre-tax dollars is a strategy many people use to reduce their overall tax liability. 

Investment

Superannuation funds are invested in a range of assets, including shares, property, and fixed interest. The returns on these investments contribute to the growth of the super balance over time.

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Superannuation helps to ensure that people will have sufficient funds to support themselves in retirement, reducing the reliance on the Age Pension and improving the overall financial well-being of retirees. It encourages long-term savings and provides a structured way to accumulate wealth over an individual's working life.

Do I need to pay myself super?

Whether you are required to make compulsory superannuation payments into your super fund depends on how you are remunerated by your business. If you are a sole trader, you are not required to make compulsory super contributions on your own behalf. However, if your business is set up as a company, and you are paid as an employee, the company will be required to make SG payments. 

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Depending on your current cash flow needs and future retirement goals, contributing to super should be considered as part of your retirement planning. 

Paying super as a self-employed sole trader

Concessional contributions

Concessional contributions are treated with a reduced tax rate. These contributions are taxed at 15% upon entering the superannuation fund, and are sometimes called “before-tax contributions” as they are paid into super before the income tax rate is applied to the amount. For example, if your marginal tax rate is 45%, and $1,000 of earnings is paid to super from “before-tax” dollars, this amount of money will be taxed at 15% in the super fund, rather than 45% in income tax (after the 15% tax, $850 lands in super). To ensure this amount of money is taxed inside of super at 15% rather than outside of super at a potentially higher rate, the self-employed person is eligible to receive a tax deduction for these contributions. Employer SG payments are concessional contributions and are also tax deductible for the employer.  

Non-concessional contributions

Non-concessional contributions are payments made to super from money you have already paid income tax on. These contributions are not taxed by the super fund. For example, with the $1,000 we mentioned above, it would be taxed at the individual’s marginal tax rate of 45%, with a $450 income tax liability. Comparing both of these examples, we saw a $1,000 concessional contribution reduced by $150 vs. a $1,000 non-concessional contribution with an income tax liability of $450. 

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When you make non-concessional contributions to your super fund from after-tax money, you may be eligible to receive the Government co-contribution up to a maximum of $500. 

Contributions caps

For the 2024-25 financial year, the concessional contributions cap is $30,000. The non-concessional contributions cap is $120,000. It’s important to keep in mind as a sole trader that if you claim a deduction for a contribution, it essentially means that contribution becomes a concessional contribution, with a limit of only $30,000.

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Tips for tradies

Understand the importance of superannuation

While superannuation is not compulsory for self-employed people, it’s important you plan for your retirement and have a clear view of how you’ll achieve your goal lifestyle. 

Take advantage of tax benefits

Concessional contributions are taxed at a lower rate of 15%, which can reduce your overall tax liability compared to your marginal tax rate. This strategy can help maximise your retirement savings while minimising your current tax burden. The limit for this contribution type is $30,000.

Non-concessional contributions, made from after-tax income, are not taxed upon entering the super fund. These contributions may also be eligible for government co-contributions. The yearly limit is $120,000.

Plan your contributions

Assess your current cash flow needs and future retirement goals to determine how much to contribute to your super. Be mindful of contribution caps to avoid excess contributions taxes and penalties.

Seek advice

Seeking professional advice is crucial for navigating the complexities of superannuation and maximising its benefits. Bonerath & Co. can help tradies optimise their superannuation contributions, ensuring you maximise tax benefits, plan effectively for cash flow, and remain compliant with regulations.

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