What Is Salary Sacrificing and How Does It Affect Your Take-Home Pay?

What Is Salary Sacrificing?

Salary sacrificing is an agreement between you and your employer to reduce your before-tax salary in return for certain benefits. The Australian Taxation Office explains that this arrangement lowers your taxable income, meaning you may pay less income tax and Medicare levy. It is also known as salary packaging or total remuneration packaging.

How It Works

You and your employer agree on a set of benefits before you perform the work. The benefits replace part of your salary. For example, you might package a $100,000 salary so you receive $85,000 as cash and $15,000 in car expenses. Your taxable income becomes $85,000, and you pay tax on that lower amount. The employer usually pays fringe benefits tax (FBT) on the benefits, which can limit what is offered.

There is no restriction on the types of benefits you can sacrifice, but it depends on your employer’s policy. Common items include cars, electronic devices, childcare, and super contributions. The key is that the arrangement must be in place before you earn the salary – you cannot sacrifice after you have been paid.

Example from the ATO

The ATO provides a comparison table for an employee earning $65,000 annually. Without salary packaging, taxable income is $65,000, income tax (2025–26 rates) is $10,288, and Medicare levy is $1,300, leaving net disposable income of $41,912 after car expenses. With a car benefit sacrificed ($17,353), taxable income drops to $47,647, tax falls to $5,082, and Medicare to $953, but net disposable income is $41,612 – slightly less. However, if you make an employee contribution of $7,000 towards the car, taxable income is $60,855, tax $9,045, Medicare $1,217, and net disposable income rises to $43,593. This shows that structuring contributions can improve your after-tax position.

Impact on Tax and Medicare

Because salary sacrificing reduces your taxable income, you move into a lower tax bracket or pay less at your marginal rate. For 2026–27, the tax rates are:

• $0–$18,200: Nil
• $18,201–$45,000: 15c per $1 over $18,200
• $45,001–$135,000: $4,020 plus 30c per $1 over $45,000
• $135,001–$190,000: $31,020 plus 37c per $1 over $135,000
• $190,001+: $51,370 plus 45c per $1 over $190,000

You also pay the Medicare levy of 2% of taxable income. The latest 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, the levy is reduced on a sliding scale. Full-time salaries almost always exceed $35,013, so you pay the full 2%.

Salary sacrificing can also affect the Medicare levy surcharge if you do not have appropriate private hospital cover and your income exceeds the surcharge threshold. Additionally, it may reduce your entitlement to certain tax offsets, such as the Low Income Tax Offset (LITO), and affect child support payments or government benefits like Family Tax Benefit.

Superannuation Considerations

Salary sacrificed super contributions are treated as employer contributions and are not subject to FBT. They count towards your concessional contributions cap ($32,500 for 2026–27). Your employer must still pay the super guarantee (12% from 1 July 2026) on your original salary, not the reduced salary. This means you can boost your super without losing the compulsory contributions.

However, if you exceed the cap, you pay additional tax. Also, you cannot claim a tax deduction for expenses your employer pays as part of the package.

What Changes from 1 April 2027?

From 1 April 2027, work-related items (e.g., laptops, phones, tools) provided through a salary sacrifice arrangement will no longer be exempt from FBT. This means employers may be less willing to offer these benefits, or they may pass on the FBT cost to you. Check with your employer before entering a new arrangement.

Is Salary Sacrificing Right for You?

Salary sacrificing can reduce your tax bill, but it is not always beneficial. You need to compare the tax saved with any FBT payable, employee contributions, and the impact on your net disposable income. Use the Take-home pay calculator to estimate your after-tax salary with and without packaging. Also consider how it affects your Super and eligibility for government support.

For more details, see the Salary packaging guide on this site. The Australian Taxation Office provides official guidance on salary sacrificing, and offers practical examples.

Key Takeaways

• Salary sacrificing reduces your taxable income, so you pay less income tax and Medicare levy.
• Benefits must be agreed before you earn the salary.
• Your super guarantee is unaffected, but sacrificed super counts towards your concessional cap.
• From 1 April 2027, work-related items lose FBT exemption.
• Always consider the net effect on your disposable income, not just the tax saving.