Making additional personal contributions to superannuation is a great way to boost your retirement savings in a tax-effective way. But there are strict caps or limits on the amount you can contribute each year and stiff tax penalties for exceeding the limits.

Even though the annual contribution caps went up on 1 July 2021, you still need to keep a close eye on how much you and your employer contribute.

If you do go over your annual caps, it could be a costly mistake come tax time.

Higher limits from 1 July 2021

It’s important to remember there are caps on both the concessional (pre-tax) and non-concessional (after-tax) contributions you can make each year.

From 1 July 2021, the cap on concessional contributions into super is $27,500, regardless of your age. In recent years this annual cap was only $25,000, so the new higher limit means you can add a little more of your pre-tax income to your retirement nest-egg.

It’s worth remembering that your $27,500 concessional cap includes any contributions made into your account by your employer and any salary sacrifice amounts. Also, your employer’s compulsory super guarantee amounts increased from 9.5 per cent to 10 per cent from 1 July 2021, so you may need to be extra careful about exceeding your cap.

If your super account balance could do with a little help and you haven’t used the entire amount of your annual concessional contributions cap in recent years, you may be eligible to contribute a larger amount using the ‘carry-forward’ rule.

The annual cap on non-concessional (after-tax) contributions also rose on 1 July 2021 from $100,000 to $110,000.

If you meet certain eligibility criteria, you may be able to contribute up to three years of non-concessional contributions caps (3 years x $110,000 = $330,000) in a single financial year, by ‘bringing forward’ up to two years’ contribution caps. The rules for doing this have recently become even more complex, so ensure you talk to us before making your contribution.

What happens if I exceed my caps?

In short, you could be up for additional tax. The actual amount of tax will depend on your age, the type of contribution and the financial year in which the contribution was made.

Exceeding your concessional cap

Going over your concessional contributions cap, generally means a bigger tax bill because the excess amount is counted as part of your assessable personal income.

Until 30 June 2021, you were also required to pay a penalty to the ATO called the excess concessional contributions (ECC) charge. This was removed from 1 July 2021, but you will still be up for additional tax.

If you exceed your annual concessional contributions cap, the ATO will notify you. Your excess contributions are then included in your assessable income, meaning they are taxed at your marginal tax rate, minus a 15 per cent tax offset to reflect the contributions tax you paid when the money entered your account.

You then have a choice:

• You can withdraw up to 85 per cent of your excess concessional contributions from your super.

• Or, if you choose to leave the contributions in your super account, they are counted towards your annual non-concessional contributions cap. This may create additional challenges if you have also made large non-concessional contributions.

Exceeding your non-concessional cap

Making non-concessional contributions that go over your annual cap also results in a larger tax bill, as these excess contributions are taxed at the top tax rate of 47 per cent (including the Medicare levy).

The ATO will notify you and you can then choose to withdraw your excess contributions and 85 per cent of the earnings on them. Generally, these earnings will be taxed at your marginal tax rate less a tax offset.

However, if you decide to leave your excess non-concessional contributions in your super account, they are taxed at 47 per cent, even if your personal marginal tax rate is lower. As non-concessional contributions are from after-tax money, this means you are paying double tax, because the tax amount must be paid from money in your super account.

Making additional voluntary super contributions is a great way to boost your retirement savings, but as you can see, it is important to know your limits.

If you would like more information about saving for your retirement and making some extra contributions into your super fund, call us today.