Superannuation for the Self-Employed

Superannuation is a vehicle to reduce tax and save for retirement. But for many self-employed people, it’s easy to forget about contributing to super while you’re busy running your business.

Unlike employees, you don’t have to pay the compulsory super guarantee (currently 10% of wages) to yourself as it’s not compulsory for self-employed people in Australia to have super. While superannuation isn’t necessarily essential for your overall financial strategy, it’s the most common way people build their retirement savings and is worth considering.

Below are four essential areas you need to consider about superannuation if you are self-employed.

1. Having no (or not enough) super can financially affect your retirement

The latest available figures show that 20% of self-employed people have no super at all. In addition, many of those that do have super, have balances up to 50% lower than those of employees of the same age.

If you’re in either of those positions, you run the risk of not having enough money for a comfortable retirement — unless you have enough investments or assets held elsewhere.

Not having enough money saved for retirement means you might not be able to afford to retire when you want to, or you might have to significantly adjust your lifestyle when you do.

If you want to be in a similar position to your counterparts who receive the employer super guarantee (SG), consider contributing 10% of your income to your super.

2. Super contributions are tax-deductible

The government wants us to fund our own retirement as much as possible, so they provide tax incentives for you to put money into super. If you’re self-employed and you contribute to super, you can claim up to $27,500 each year as a tax deduction. This amount is known as the concessional contributions cap. Making tax-deductible super contributions will reduce the amount of income tax you pay.

You can also carry forward any unused concessional super contributions from the 2019-2020 financial year onwards to increase the amount you can contribute each year. This can help you to catch up with your super contributions from years where you didn’t make any.

Even though your super contribution will be taxed at 15% in your fund, that’s a lower percentage than even the lowest marginal income tax rate in Australia. If you earn more than $18,200 (the tax-free threshold), making a super contribution will lower the amount of tax you pay.

The more you earn, the more tax you will save. For example, if you’re on the top marginal tax rate (45%), you will save 30% in tax after factoring in the 15% contribution tax in your super fund.

3. You might be eligible for a government co-contribution to your super

You will be eligible for a government co-contribution to your super of up to $500 if you make a super payment and your annual income is between $41,112 and $56,112 in the 2021/2022 financial year. This means, if your income falls within this threshold and you contribute $1,000 to your super fund, you could be eligible for the government to make a super contribution on your behalf of up to $500.

4. Are you covered by insurance?

Many super funds offer three key types of insurance for members:

life insurance,
total and permanent disability, and
income protection.

If you don’t have any super at all, you obviously won’t have any of this insurance unless you’ve arranged it separately.

If you’re still contributing to a super fund that was set up to receive your SG, you may still be covered. However, it’s important to check if the income protection insurance applies to your self-employment. It may not.

If it doesn’t, consider taking out income protection insurance outside of super. The consequences could be financially devastating if you couldn’t work in your business for any length of time and weren’t appropriately covered — you may be eligible for a tax deduction for your policy outside of super too.

While you’re assessing your insurance, check that you have the right amount of life and TPD cover.

Should I contribute to super?

Superannuation isn’t legally required for the self-employed, but it’s worth considering — with the advice of a financial professional — as part of your financial plan and investment strategy. The tax benefits that come with superannuation are unrivalled, however, your super will be locked away until you meet a condition of release, so it’s essential to come up with a strategy that suits your lifestyle and retirement goals.

Earlypay specializes in business finance. If you'd like to learn about how our business line of credit, invoice financing, or equipment finance can help your business, please call our friendly team on 1300 760 205 or contact your broker or BDM.