How Does Salary Sacrificing Work? A Guide to Your Take-Home Pay

How Does Salary Sacrificing Work?

Salary sacrificing—also known as salary packaging or total remuneration packaging—is a way to structure your pay so that you receive less cash salary and more non-cash benefits. The Australian Taxation Office explains that you and your employer agree for you to receive less income before tax, and in return your employer pays for certain benefits of similar value. This reduces your taxable income, meaning you may pay less income tax and Medicare levy.

How It Affects Your Take-Home Pay

Your take-home pay is the amount that reaches your bank account after tax, Medicare, and any salary sacrifice deductions. Under a salary sacrifice arrangement, your employer withholds less tax because your taxable income is lower. However, the benefits you receive may be subject to fringe benefits tax (FBT), which your employer pays. To reduce their FBT, your employer may ask you to make employee contributions from your after-tax salary.

The ATO provides a clear example for the 2025–26 year comparing three scenarios for a $65,000 annual salary:

Scenario	Taxable Income	Income Tax + Medicare	Net Disposable Income
No salary sacrifice	$65,000	$11,588	$41,912
Salary sacrifice car (no employee contribution)	$47,647	$6,035	$41,612
Salary sacrifice car (with $7,000 employee contribution)	$60,855	$10,262	$43,593

In the third scenario, the employee makes a $7,000 contribution, which reduces the FBT payable by the employer and results in a higher net disposable income. Your own take-home will vary based on your salary, the benefits you choose, and whether you make employee contributions.

Impact on Medicare Levy

The Medicare levy is 2% of your taxable income, but there are thresholds for low-income earners. For 2026–27, the single-person thresholds are $28,011 (lower) and $35,013 (upper). If your taxable income is below $28,011, you pay no Medicare levy. Between $28,011 and $35,013, you pay a tapered rate of 10 cents per dollar over the lower threshold. Above $35,013, you pay the full 2%. Salary sacrificing reduces your taxable income, which could move you below these thresholds and reduce or eliminate your Medicare levy.

Salary Sacrifice and Super

You can also salary sacrifice contributions into your super fund. These are treated as employer contributions and are taxed at 15% inside the fund—often lower than your marginal tax rate. However, they count towards the concessional contributions cap of $32,500 for 2026–27 (including your employer's super guarantee). Your employer must still pay the full super guarantee on your original salary, as if no salary sacrifice existed. The Australian Taxation Office notes that salary sacrificed super contributions are not fringe benefits if paid to a complying super fund.

Things to Consider

Before entering a salary sacrifice arrangement, consider:

• Fringe benefits tax: Your employer may pass on the cost of FBT through reduced benefits or require employee contributions.
• Government benefits: Your adjusted taxable income may affect family tax benefits, child support, or the Medicare levy surcharge.
• Reportable fringe benefits: Some benefits are reported on your income statement and may affect your eligibility for certain tax offsets or government payments.
• Professional advice: Salary packaging is usually more effective for middle to high incomes. Moneysmart recommends getting professional tax advice to work out if it's right for you.

For more details, see our guides on Salary packaging and Tax and Medicare. You can also use our Take-home pay calculator to estimate your after-tax income.

Key Takeaways

• Salary sacrificing reduces your taxable income, potentially lowering your income tax and Medicare levy.
• Your take-home pay depends on the benefits you choose and any employee contributions.
• Salary sacrificed super contributions are taxed at 15% in the fund and count towards the concessional cap.
• Always check the impact on government benefits and seek professional advice if unsure.

The Australian Taxation Office and Moneysmart provide comprehensive information on how salary sacrificing works and its tax implications.