How Does Salary Sacrifice Work? A Guide to After-Tax Salary

How Does Salary Sacrifice Work? Understanding Your Take-Home Pay

Salary sacrifice (also called salary packaging) is a way to reduce your taxable income by swapping part of your salary for benefits your employer pays for. This can affect your fortnightly take-home pay, your Medicare levy, and your super. To understand how does salary sacrifice work, you need to see how it interacts with tax brackets, the Medicare levy, and super contributions.

How Salary Sacrifice Changes Your Taxable Income

When you enter a salary sacrifice arrangement, you and your employer agree that you will receive less salary before tax, and in return your employer provides a benefit of similar value. The sacrificed amount is not included in your assessable income, so you pay less income tax and Medicare levy. However, your employer may have to pay fringe benefits tax (FBT) on some benefits, which can reduce the overall saving. The Australian Taxation Office explains that there is no restriction on the types of benefits, but FBT applies to most fringe benefits unless exempt.

Impact on Fortnightly Take-Home Pay

Your take-home pay is the amount deposited into your bank account after tax and the Medicare levy. Salary sacrifice reduces the salary paid to you, so your gross pay each fortnight is lower. But because your taxable income is lower, less tax is withheld. The net effect on your disposable income depends on whether you would have paid for the benefit with after-tax money anyway. The ATO provides a clear example comparing three scenarios for a $65,000 salary:

• No salary sacrifice: taxable income $65,000, tax $10,288, Medicare $1,300, car expenses $11,500, net disposable income $41,912.
• Salary sacrifice without employee contributions: taxable income $47,647, tax $5,082, Medicare $953, net disposable income $41,612 (no car expenses).
• **Salary sacrifice with employee contributions: taxable income $60,855, tax $9,044, Medicare $1,217, employee contribution $7,000, net disposable income $43,593.

In this case, salary sacrifice with employee contributions actually increases net disposable income because the employee contribution reduces FBT. Your fortnightly take-home will be lower than the no-sacrifice scenario, but you don't pay car expenses separately.

Medicare Levy and Thresholds

The Medicare levy is 2% of taxable income if your income exceeds the full-rate threshold. For 2026–27, the single thresholds are $28,011 and $35,013. If your taxable income after salary sacrifice is still above $35,013, you pay the full 2% Medicare levy. Salary sacrifice can push you below the threshold, reducing or eliminating the levy. For example, if your salary is $45,000 and you sacrifice $10,000, your taxable income becomes $35,000, which is below the upper threshold, so you pay a reduced Medicare levy (shading rate). This can increase your take-home pay.

Super and Salary Sacrifice

You can also salary sacrifice super contributions. These are not fringe benefits and your employer does not pay FBT. The contributions are taxed in your super fund at 15%, which is usually lower than your marginal tax rate. However, they count towards the concessional contributions cap ($32,500 for 2026–27). Your employer must still pay the super guarantee on your original salary (12% from 1 July 2026). Salary sacrificing super reduces your take-home pay because the sacrificed amount goes to super, not your bank account. But it boosts your retirement savings tax-effectively. The Moneysmart website notes that salary packaging is usually more effective for middle to high incomes because of higher marginal tax rates.

Considerations for Your Fortnightly Pay

Before setting up a salary sacrifice arrangement, check how it affects your fortnightly pay. Your employer will withhold less tax, but your gross pay will be lower. Use the Take-home pay calculator to estimate the net effect. Also consider that salary sacrifice can affect government benefits, child support, and the Medicare levy surcharge. The ATO warns that reportable fringe benefits may appear on your income statement and affect some entitlements.

Key Takeaways

• Salary sacrifice reduces taxable income, potentially lowering tax and Medicare levy.
• Your take-home pay will be lower because the sacrificed amount is not paid to you, but you receive a benefit.
• Employee contributions can reduce FBT and improve net disposable income.
• Super sacrifice is tax-effective but reduces immediate take-home pay.
• Always check the concessional cap and Division 293 tax if your income plus super exceeds $250,000.

For more details on how salary packaging options, see our Salary packaging guide.