Congratulations, you’ve been promoted! But have you really considered how your job promotion can be used to your financial advantage?
For high earners, a job promotion will likely bring more taxable income and possibly access to an executive share scheme or if you already have one, bonus or performance-based shares. However, it is also important to recognise your well-deserved financial reward could quite possibly disappear into everyday expenses unless you actively capture it. And, there are other considerations too – an additional layer of complexity and impacts on your personal risk insurance.
Job promotion can herald significant changes that affect your income, super, executive share scheme and personal insurance. To make the most of the opportunities a job promotion can bring, it’s important to take stock of what it really means to you financially.
All too often a promotion paves the way for increased expenditure which is often the result of an incorrect assumption that you can afford it, given your increased salary package.
I’m very much in agreement with high earners enjoying their income, particularly as reward for what is often high stress and high responsibility effort, however, it’s a smart move to first understand how you can make best use of the extra money and any aligned financial benefits. This will allow you to truly reap the reward and enjoy your money and lifestyle with confidence.
1: Extra Income & Cashflow
Your income will increase with your job promotion, so capture it and put it to use. Extra cash can disappear into the abyss of day-to-day expenses, often without realising it, or it can accumulate as surplus cash in your (currently low interest rate) bank account. Consider directing the increased amount of your income to pay down debt faster or contribute it to superannuation and boost your retirement nest egg.
2: Your Superannuation
Increased income will in many circumstances result in an increase to the mandated contributions your employer is required to pay. It’s important to be aware that these additional contributions, if not managed appropriately, may result in you exceeding your super annual contributions caps.
Alternatively, increased income may mean you’re in a position to consider additional tax effective contributions to superannuation via salary sacrifice.
Salary sacrificing to top up your super can provide tax benefits. Within the superannuation environment, your concessional (pre-tax) contribution is taxed at 15%, whereas your marginal tax rate could be as much as 47% (including 2% Medicare Levy).
For those already salary sacrificing, it is important you avoid exceeding the annual concessional contribution cap of $27,500 as this may incur tax penalties. However, there may be opportunity for you to use the ‘catch-up’ provision to contribute more to your super account.
That is, if you haven’t contributed the full tax effective cap amounts in prior years, you may be able to make use of the unused cap amounts.
3: Your Personal Risk Insurance
With promotion, it is possible your lifestyle expectations will also increase to match your higher level of income.
It’s not only Income Protection insurance, which would be wise to review in light of your increased income, but also your other personal insurance covers including Life, Total and Permanent Disability and Trauma cover.
4: Your Executive Share Scheme (ESS)
Your job promotion could mean that you are offered a long-term incentive plan from your employer. This might include receiving management awards or performance awards for the first time.
ESS is inherently complex, and if your promotion includes a new scheme there may be other rules (and even more complexity) that must be observed.
ESS provides what can be very favourable opportunities for personal wealth, but there are strict tax compliance and vesting requirements that you will need to actively manage, or engage a professional to manage for you. Failing to meet these obligations can result in paying unnecessary tax and in some cases, penalties for non-compliance.
For those already participating in a long-term incentive scheme, a promotion might mean the quantum of shares granted to you has increased with your higher income (as these are often granted based on a percentage of your cash salary) or the percentage applied against your salary has increased as you’ve been promoted to a higher ‘band’.
Your next steps
May I suggest, you consider your promotion as part of your overall wealth strategy in addition to reward for a job well done. From this perspective consider the pros, such as having more cash to enjoy more lifestyle benefits, and the cons which will very likely include paying more tax or finding the time to manage the complexities of your ESS, then consider what you really want your hard-earned money to achieve for you.
Then, because your personal financial affairs are multi-faceted, ask yourself if you have the time, expertise, and indeed, the desire to manage your income, superannuation, tax, personal risk insurance and ESS. And do you think your capabilities are such that you can take full advantage of the benefits your promotion brings.
Finally, and as further food for thought, it’s worth considering a 2021 Australian study that calculated the value of ‘advised’ versus ‘non-advised’ financial decision making which revealed those who sought financial advice, achieved average outcomes that were 5.2% better on their investment portfolios. [1]
For more information and advice about taking full advantage of your promotion please contact James Marshall on (07) 3007 2000 or email contact@resourcesunearthed.com.au
Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in mining and resources.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decision.
Please note: Tax advice and other services not offered under the Fortnum Private Wealth AFSL are referred to appropriately qualified professionals.
[1] 2021 Value of an Adviser Report – Russell Investments
