How to use your tax cuts to save cash

Millions of Australians have started to receive extra money in their pay packets. This is what you should do with the additional money.

Bigger pay cheques have started arriving in the bank accounts of millions of Australians but experts are urging people to think carefully about what they do with the extra cash.

The Federal Government’s legislated personal income tax cuts were brought forward from 1 July 2022 to now (backdated to 1 July 2020), delivering a worker earning between $45,000 and $90,000 an extra $1080 in their hand.

This is equivalent to about $21 a week up until 1 July 2021, when this tax cut phases out due to the removal of the low and middle income tax offset.

Kimberley Swaysland, pictured with Melvin the French Bulldog, will pocket an extra $20 a week in her savings. Picture: Image/Josh Woning

While for a worker earning between $90,000 and $120,000, the tax cut will vary from between $1080 for someone earning $90,000 to $2,430 for someone earning $120,000 or above) – or between $21 and $47 per week depending on your income.

New independent research commissioned by Colonial First State which surveyed 2000 people found a majority are planning on safely tucking away the money.

It showed many people have a range of things they plan on doing with the cash:

• 57 per cent plan on saving the money.

• 22 per cent intend to spend it.

• 20 per cent will put it towards extra mortgage repayments.

• 16 per cent will invest in the sharemarket.

• 11 per cent plan to pay off high interest debt.

Administration officer Kimberley Swaysland, 28, from Calamvale in Brisbane’s south, earns about $65,000 per year and is among millions of Australians receiving about $20 extra in her take-home pay each week.

Kimberley Swaysland is being smart with the way she will use the extra cash. Picture: Image/Josh Woning

“I want to save the money and either put it towards a house deposit or potentially put it into my super,” she says.

“It’s good to have the money there in a savings account, I have about $5000 in savings so an extra $10 or $20 a fortnight is great.

“I’m at the age I’m looking at buying a home so it would be saved for something important.”

During the pandemic more than 650,000 credit card accounts have been shut down and billions wiped off credit card debt.

Colonial First State’s spokeswoman Kelly Power says with any extra cash Australians should first think about managing their debt.

“Whether it’s a personal loan, credit card or a mortgage or a combination the general rule is to pay off any high interest debt first,” she says.

“Then consider whether you can balance out spending now and saving a bit, the younger you are the more you can put aside and the bigger your retirement balance will be.

“Most Australians are going to get about $1080 or $20 a week in their pockets (through the tax cuts), if they salary sacrifice $15 of their pre-tax income they are still left with an

$10 a week in their back pockets.

“They also get over $40,000 extra at retirement.”

Tribeca Financial’s chief executive officer Ryan Watson says for any Australians with high interest debts, paying these off should be the first priority.

“First and foremost, people should use this money to reduce or pay-off any outstanding credit card debt – credit card interest is dead money,” he says.

“Then, build up their ‘rainy day’ account.

“We prescribe that our clients should have 3 months worth of salary tucked away in a savings account, in case of an emergency.”

But after a tough year for many Watson says rewarding yourself every now and then is also important.

“Use a percentage of the tax cut, say 15 per cent and go and buy yourself something nice,” he says.

“Or even better, spend the money on an experience with others – an opportunity to reconnect with people again and to put money back into small business.”

HOW TO USE TAX CUTS

• Pay off high interest debt, such as credit cards and personal loans.

• Top up your superannuation.

• Put the money into a savings account.

• Put it towards a savings goal, for example a first home deposit.

• Pay extra off your mortgage, if you have one.

• Invest in the sharemarket.

• Treat yourself to something special after a tough year.

@sophieelsworth