How to Salary Package a Car: Boost Your Take-Home Pay

How to Salary Package a Car and Understand Your Take-Home Pay

Many employees confuse their gross salary with their total remuneration package. When you learn how to salary package a car, you swap part of your pre-tax income for a benefit – like a car and its running costs. This can lower your taxable income and, if done right, increase the amount that reaches your bank account after tax and the Medicare levy.

What Is Salary Packaging a Car?

Salary packaging (also called salary sacrificing) is an agreement between you and your employer. You forgo some of your before-tax salary, and your employer provides a benefit of similar value. The Australian Taxation Office explains that this reduces your taxable income, so you may pay less income tax. Common benefits include cars, phones, school fees, and childcare.

For a car, your employer may provide the vehicle and pay for registration, insurance, fuel, and maintenance. Because the car is a fringe benefit, your employer must pay fringe benefits tax (FBT) on its taxable value. This cost can be passed back to you through a higher salary sacrifice amount or an employee contribution.

How a Car Package Affects Your Take-Home Pay

Your take-home pay is what lands in your bank account after income tax and the Medicare levy. A salary package changes this by reducing your taxable income. However, you also lose the cash you would have used to pay for the car yourself. The net effect depends on your salary, the car’s value, and how FBT is handled.

The ATO provides a clear example for the 2025–26 year. Sam earns $65,000 annually and considers a $35,000 car with $11,500 in running costs. Three scenarios are compared:

1. No salary packaging – Sam pays for the car out of after-tax income. Taxable income is $65,000. After income tax ($10,288) and Medicare levy ($1,300), and then paying $11,500 in car expenses, net disposable income is $41,912.

2. Salary packaging without employee contributions – Sam sacrifices $17,353 of salary. Taxable income drops to $47,647. Tax and Medicare total $6,035.04. No car expenses are paid directly, but the employer’s FBT is covered by the sacrifice. Net disposable income is $41,611.96 – slightly less than no packaging.

3. Salary packaging with employee contributions – Sam sacrifices only $4,145 and makes a $7,000 after-tax employee contribution to reduce FBT. Taxable income is $60,855. Tax and Medicare total $10,261.60. After the employee contribution, net disposable income is $43,593.40 – a gain of $1,681.40 over no packaging.

This shows that how to salary package a car effectively often requires an employee contribution to avoid losing the tax benefit to FBT.

Key Considerations for Your Take-Home Pay

• Tax rates for 2026–27: The resident tax scale applies. For example, income up to $18,200 is tax-free; then 15¢ per dollar up to $45,000; then 30¢ per dollar up to $135,000. The Medicare levy is 2% of taxable income, but if your income is below $28,011 (single lower threshold) you pay none; between $28,011 and $35,013 you pay a reduced rate (10¢ per dollar over $28,011). Full-time salaries above $35,013 pay the full 2%.
• Super guarantee: Your employer must still pay the 12% super guarantee on your ordinary time earnings, even if you salary sacrifice. The sacrificed amount does not reduce your super entitlement.
• Reportable fringe benefits: The taxable value of the car benefit (multiplied by 1.8868) appears on your income statement. This can affect Medicare levy surcharge, study loan repayments, and some government benefits.

Steps to Set Up a Car Salary Package

1. Check with your employer – Not all employers offer car packaging. If they do, they may have a preferred provider or novated lease arrangement.
2. Understand the FBT method – Most employers use the statutory method (20% of the car’s base value). The operating cost method is an alternative if you have logbook records.
3. Decide on employee contributions – Paying an after-tax contribution to your employer can reduce the FBT and lower the amount you need to sacrifice, often improving your take-home pay.
4. Get a quote – The salary packaging provider will calculate the sacrifice amount, FBT, and your net position.
5. Sign the agreement before you earn the income – An effective salary sacrifice must be in place before you perform the work.

Is It Worth It?

Salary packaging a car can boost your take-home pay, but it’s not automatic. The Moneysmart website notes that whether it’s worth it depends on your income, the benefits available, and any associated costs. For higher-income earners, the tax savings are larger because they are in a higher marginal bracket. For those on lower incomes, the benefit may be small or negative if FBT eats into the savings.

Always run the numbers with your employer’s calculator or a financial adviser. Remember that the ATO example above is for illustration only – your actual results will vary.