Understanding salary sacrifice childcare fees and your take-home pay
Your take-home pay depends on your salary, the amount sacrificed, and how it affects your tax and benefits; there is no single figure.
Gross salary, package, and take-home: what’s the difference?
When you see a job ad quoting a salary, it’s often a gross figure – the amount before tax, Medicare levy, and any salary sacrifice arrangements. But your employment contract might refer to a total remuneration package that includes benefits like a car or childcare fees. Understanding the difference is key to knowing what actually lands in your bank account each fortnight.
Your take-home pay is what remains after income tax and the Medicare levy are deducted. If you salary sacrifice part of your pay for benefits such as childcare, your taxable income drops, but your employer may pay fringe benefits tax (FBT) on the benefit. The Australian Taxation Office provides a detailed guide on salary sacrificing for employees, including how it affects your tax and government benefits.
The role of salary sacrifice childcare fees
Salary sacrifice childcare fees are a common way to reduce your tax bill. Under an effective arrangement, you agree to receive less salary before tax, and your employer pays your childcare fees instead. The ATO notes that there is no restriction on the types of benefits you can include, and childcare is a fringe benefit. Your employer will have to pay FBT on the value of the benefit unless you make an employee contribution to reduce it.
However, salary sacrificing childcare fees can affect your eligibility for the Child Care Subsidy (CCS). The Family Assistance Guide explains that if your employer is liable for all or part of the fees, no CCS is payable for that portion. This means you need to calculate whether the tax savings outweigh the loss of subsidy.
How salary sacrifice affects your take-home pay
Let’s look at an example. Suppose you earn $65,000 a year and salary sacrifice $4,145 for a car fringe benefit (with employee contributions). Your taxable income drops to $60,855. After income tax (using 2025–26 rates) and the 2% Medicare levy, your income after tax is about $50,593. After paying the employee contribution of $7,000, your net disposable income is $43,593 – compared to $41,912 without salary sacrifice. This example from the ATO shows that salary sacrifice can increase your disposable income, but the benefit depends on your specific circumstances.
For childcare fees, the calculation is similar. Your reduced taxable income means you pay less tax and Medicare levy. But if you lose CCS, your net benefit may shrink. Always use a Take-home pay calculator to model your situation.
Medicare levy thresholds
The Medicare levy is 2% of your taxable income, but if you earn below the single-person thresholds of $28,011 and $35,013 (the latest published figures), you may pay a reduced levy. Full-time workers on the national minimum wage of $26.44 an hour ($1,004.90 a week, or about $52,255 a year) will pay the full 2% on their taxable income. Salary sacrifice can lower your taxable income, potentially bringing you closer to the threshold, but most full-time employees will still pay the full levy.
Super and salary sacrifice
Salary sacrificed super contributions are treated as employer contributions and are not fringe benefits. Your employer must still pay the super guarantee (12% from 1 July 2026) on your ordinary time earnings, not on the sacrificed amount. This is an important distinction: salary sacrificing for super does not reduce your employer’s super obligations.
Key considerations before you salary sacrifice childcare fees
- FBT: Your employer may ask you to make an employee contribution to reduce the FBT they pay. This contribution is made from your after-tax income.
- CCS: As noted, salary sacrifice can reduce or eliminate your Child Care Subsidy. Check with the Department of Social Services or use the Clearance tool to estimate your net position.
- Other benefits: Salary sacrifice can also affect the Medicare levy surcharge, study loan repayments, and some tax offsets. The ATO advises seeking financial advice before entering an arrangement.
- Effective arrangement: To be valid, you must agree before you perform the work, have a written agreement, and have no access to the sacrificed salary. If the arrangement is not effective, the benefits become assessable income.
Final thoughts
Salary sacrifice childcare fees can be a smart way to reduce your tax, but it’s not a simple trade-off. Your take-home pay may increase, but your government benefits may decrease. Use the Salary packaging guide and Tax and Medicare resources to understand the full picture. Always run the numbers with your specific salary, sacrifice amount, and family situation.
For more details, refer to the guide on salary sacrificing and the page on salary sacrificing for CCS.
Questions
What is salary sacrifice for childcare?
Salary sacrifice for childcare is an arrangement where you agree to forgo part of your pre-tax salary in exchange for your employer paying your childcare fees. This reduces your taxable income, so you pay less income tax and Medicare levy. However, your employer may have to pay fringe benefits tax (FBT) on the benefit. The Australian Taxation Office explains that common fringe benefits include payment of expenses such as childcare costs. You cannot claim a tax deduction for childcare expenses your employer pays as part of a salary package.
How does salary sacrifice childcare fees affect my Child Care Subsidy (CCS)?
If your employer is liable for all or part of the childcare fees under a salary sacrifice arrangement, no CCS or Additional Child Care Subsidy (ACCS) is payable for that portion. The Family Assistance Guide states that CCS is only payable for fees you are genuinely liable to pay. This means salary sacrificing childcare fees can reduce the amount of government subsidy you receive, so you need to weigh the tax savings against the loss of CCS.
Does salary sacrifice reduce my Medicare levy?
Yes, because salary sacrifice lowers your taxable income. The Medicare levy is 2% of your taxable income. If your taxable income falls below the single-person thresholds ($28,011 and $35,013 for the latest published figures), you may pay a reduced levy or none at all. However, full-time workers on typical salaries will still pay the full 2% on their reduced income. Note that salary sacrifice does not affect the Medicare levy surcharge if you have private hospital cover.