The Hidden Disadvantages of Salary Sacrifice: What You Need to Know

What Is Salary Sacrifice?

Salary sacrifice (also called salary packaging) is an arrangement where you agree to receive less pre-tax salary in exchange for your employer providing certain benefits. This reduces your taxable income, so you pay less income tax and Medicare levy. Common benefits include cars, laptops, childcare, and additional super contributions. However, while the tax savings can be attractive, there are several disadvantages of salary sacrifice you should weigh before signing up.

Key Disadvantages of Salary Sacrifice

1. Reduced Eligibility for Government Benefits and Tax Offsets

Because salary sacrifice lowers your taxable income, it can reduce or eliminate your eligibility for means-tested benefits such as Family Tax Benefit, Child Care Subsidy, and the Medicare levy surcharge exemption. It also affects the Low Income Tax Offset (LITO). For example, LITO phases out between $37,500 and $66,667 – a lower taxable income might push you into a more generous offset bracket, but if your income drops too low you could miss out on other support. The Australian Taxation Office warns that salary sacrifice may affect child support payments and study loan repayments.

2. Fringe Benefits Tax (FBT) and Employee Contributions

Most packaged benefits are fringe benefits, and your employer must pay FBT at the top marginal rate (47% including Medicare levy). To avoid this cost, employers often ask you to make an employee contribution from your after-tax pay. As the ATO’s example shows, a car benefit with a $7,000 employee contribution can actually increase your net disposable income compared to no contribution, but it still reduces your take-home cash. From 1 April 2027, work-related items like laptops and phones will no longer be FBT-exempt, making them less attractive to package.

3. Impact on Borrowing Power

When you apply for a home loan, lenders assess your ability to repay based on your taxable income. Salary sacrifice reduces that figure, which can lower the amount you can borrow. Even though your actual cash flow might be similar, lenders often use the lower taxable income in their calculations. This is a hidden cost that many employees overlook.

4. Super Contribution Caps and Complexity

Salary-sacrificed super contributions count towards your concessional cap ($32,500 for 2026–27). If you also receive employer super guarantee contributions (12% of your ordinary time earnings), you could easily exceed the cap if you sacrifice too much. The ATO notes that excess contributions are taxed at your marginal rate plus an additional 15% – wiping out any tax benefit. You must also ensure your arrangement is “effective” (agreed before you earn the income) or the benefits may be treated as assessable income.

5. Reduced Flexibility and Cash Flow

Once you enter a salary sacrifice arrangement, you cannot access the sacrificed salary for the period of the agreement. If your circumstances change (e.g., you need cash for an emergency), you cannot simply reverse the arrangement. The ATO states that if a benefit is cashed out, it becomes salary and is taxed as normal income. This lack of flexibility is a significant disadvantage for those with variable expenses.

6. No Double-Dipping on Deductions

You cannot claim a tax deduction for an expense your employer pays for as part of your salary package. For example, if you salary sacrifice a work-related laptop, you cannot also claim it as a deduction on your tax return. This is a trade-off that reduces the overall benefit.

How Salary Sacrifice Compares to Benchmarks

To put these disadvantages in perspective, consider the national minimum wage of $26.44 per hour ($1,004.90 per week) and full-time adult ordinary time earnings of $2,083.70 per week (ABS, May 2026). If you earn around the minimum wage, salary sacrifice may not be worthwhile because your marginal tax rate is low (19% or nil) and the FBT costs could outweigh savings. For someone on full-time average earnings, the higher marginal rate (30% or 37%) makes packaging more attractive, but the disadvantages still apply – especially the impact on borrowing and benefit eligibility.

Should You Salary Sacrifice?

Salary sacrifice is not a one-size-fits-all strategy. The Australian Taxation Office and Moneysmart both recommend getting professional tax advice before committing. Consider your income level, the benefits you need, and how the arrangement affects your overall financial picture. For many, the disadvantages of salary sacrifice – reduced flexibility, lower borrowing power, and potential FBT costs – may outweigh the tax savings.

For more on how salary sacrifice affects your take-home pay, see our Take-home pay guide. Learn about super caps on our Super page. And compare your salary against benchmarks on Average pay.