How does salary packaging work and what it means for your fortnightly take-home pay

How does salary packaging work?

Salary packaging – also called salary sacrificing – is an agreement between you and your employer to swap part of your pre-tax salary for a benefit of similar value. The Australian Taxation Office explains that this reduces your taxable income, so you pay less income tax and Medicare levy. But the benefit itself may be subject to fringe benefits tax (FBT), which your employer usually pays. To make it worthwhile, many employers offer popular benefits like cars, laptops, or additional super contributions.

What changes your fortnightly take-home pay?

Your fortnightly pay changes because of three main factors: the tax brackets you fall into, the Medicare levy, and any super contributions you sacrifice. Let's look at each.

Tax brackets (2026–27)

For a resident aged 18 or over, the tax rates are:

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

These rates exclude the Medicare levy of 2%. The Low Income Tax Offset (LITO) can reduce tax for lower incomes, but it cannot reduce tax below zero.

When you salary package, your taxable income drops. For example, if you earn $65,000 and sacrifice $17,353 for a car, your taxable income falls to $47,647. That moves you from the 30c bracket down to the 15c bracket for part of your income, saving you tax. The ATO's example shows net disposable income can increase from $41,912 to $43,593 when employee contributions are used to reduce FBT.

Medicare levy

Most people pay the Medicare levy of 2% of taxable income. The latest published single-person thresholds are $28,011 (lower) and $35,013 (upper). If your taxable income is below $28,011, you pay no levy. Between $28,011 and $35,013, the levy is phased in at 10c per $1 over the lower threshold. Above $35,013, you pay the full 2%. Salary packaging can reduce your taxable income enough to lower or eliminate the Medicare levy if you are near these thresholds.

Super contributions

Salary sacrificing into super is a common strategy. Your super fund taxes these contributions at 15%, which is usually lower than your marginal rate. However, these contributions count toward your concessional cap ($32,500 for 2026–27). Your employer must still pay the 12% super guarantee on your ordinary time earnings. If you sacrifice extra super, your take-home pay drops by the sacrificed amount, but your super balance grows faster. The trade-off is less cash in hand now for more later.

How to decide if salary packaging is right for you

Salary packaging can boost your net disposable income if you choose benefits that reduce your tax without adding too much FBT. The Moneysmart website notes that common benefits like cars, computers, or childcare can be tax-effective. But you need to consider:

• The FBT your employer pays – they may ask you to make an employee contribution to reduce it.
• The impact on government benefits, child support, and the Medicare levy surcharge.
• That you cannot claim a tax deduction for the packaged expense.

Always check with your employer what benefits they offer and whether the arrangement is cost-effective for your situation.

Example: Fortnightly impact

Suppose you earn $65,000 a year (about $2,500 per fortnight before tax). Without packaging, your tax and Medicare would be roughly $445 per fortnight, leaving about $2,055. If you sacrifice $667 per fortnight for a car (the ATO example uses $17,353 annually), your taxable income drops to $47,647. Tax and Medicare become about $232 per fortnight, so your take-home is about $1,601 plus the car benefit. After paying car expenses and any employee contribution, your net disposable income may be higher than without packaging.

Key points to remember

• Salary packaging must be arranged before you earn the income.
• It reduces taxable income, so less tax and Medicare are withheld.
• Your employer still pays the full super guarantee.
• You cannot claim a tax deduction for the packaged benefit.
• The ATO warns that from 1 April 2027, work-related items provided through salary sacrifice will no longer be FBT-exempt.

For more details, see our Salary packaging guide or use the Clearance tool to estimate your take-home pay.