How to Set Up Salary Sacrifice and Boost Your Take-Home Pay
Your take-home pay depends on your salary, salary sacrifice arrangement, and tax situation; the ATO example shows net disposable income can increase by over $1,600 a year.
How to Set Up Salary Sacrifice and Understand Your Take-Home Pay
When you work as an employee in Australia, your employer withholds income tax and the Medicare levy from your pay. The amount that reaches your bank account – your take-home pay – depends on your taxable income, tax offsets like the Low Income Tax Offset (LITO), and any salary sacrifice arrangements you have in place.
What Is Salary Sacrifice?
Salary sacrifice (also called salary packaging or total remuneration packaging) is an agreement where you receive less gross salary in exchange for your employer providing certain benefits of similar value. The Australian Taxation Office explains that this reduces your taxable income, meaning you may pay less tax. However, you should seek financial advice before entering an arrangement.
How to Set Up Salary Sacrifice
To set up an effective salary sacrifice arrangement, you must:
- Enter the arrangement before you perform the work.
- Have a clear agreement (written or verbal) with your employer.
- Have no access to the sacrificed salary – if it is cashed out, it becomes ordinary income.
The ATO warns that expenses paid via direct debit from your pay are not salary sacrificed. Also, you cannot sacrifice salary or wages already earned.
How Salary Sacrifice Affects Your Take-Home Pay
By reducing your taxable income, salary sacrifice lowers the amount of tax withheld. The Medicare levy (2% of taxable income) also decreases. However, you must consider the impact on government benefits, child support, and study loan repayments. The ATO provides a detailed example comparing three scenarios for an employee earning $65,000 in 2025–26:
- No packaging: net disposable income $41,912.
- Car benefit without employee contributions: net disposable income $41,612.
- Car benefit with employee contributions of $7,000: net disposable income $43,593.
This shows that with the right structure, salary sacrifice can increase your after-tax cash flow.
Tax and Medicare Considerations
Your taxable income after salary sacrifice determines your income tax bracket and Medicare levy. For 2026–27, the tax rates are:
- Up to $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
- Over $190,000: $51,370 plus 45c per $1 over $190,000
The Medicare levy is 2% of taxable income, but if your income is below $28,011 (single), you pay no levy. Between $28,011 and $35,013, a shading applies. Full-time salaries typically pay the full 2%.
Super and Salary Sacrifice
Salary sacrificed super contributions are treated as employer contributions and are not fringe benefits if paid to a complying fund. Your employer must still pay the Super Guarantee (12% from 1 July 2026) on your ordinary time earnings, not on the sacrificed amount. This can boost your retirement savings while reducing your current tax.
Important Rules from the ATO
The ATO emphasises that an effective arrangement cannot include salary or leave entitlements accrued before the agreement. You must not have access to the sacrificed amount during the period. If you receive a fringe benefit, your employer may need to pay FBT and may ask you to make employee contributions to reduce that tax.
Using the Tax Withheld Calculator
Your employer uses PAYG withholding to deduct tax. You can check the correct withholding using the ATO’s Tax withheld calculator. This tool accounts for salary sacrifice, Medicare levy, and study loans.
Further Reading
For more details on how salary packaging works, see our Salary packaging guide. To understand how tax and Medicare affect your pay, visit Tax and Medicare. You can also compare your pay against national benchmarks on our Benchmarks page.
Summary
Setting up salary sacrifice can be a smart way to reduce tax and increase your take-home pay, but it requires careful planning. Always ensure the arrangement is effective under ATO rules, and consider seeking professional advice. Your net disposable income can improve, as shown by the ATO example, but the exact benefit depends on your salary, the benefits chosen, and any employee contributions.
Questions
What is salary sacrifice and how does it affect my take-home pay?
Salary sacrifice is an agreement with your employer to forgo part of your pre-tax salary in exchange for benefits like a car or extra super contributions. This reduces your taxable income, so you pay less income tax and Medicare levy. The ATO example for 2025–26 shows that with a car benefit and employee contributions, net disposable income rose from $41,912 to $43,593 compared to no packaging.
How do I set up an effective salary sacrifice arrangement?
To set up an effective arrangement, you must agree with your employer before you perform the work, have a written or verbal agreement, and not have access to the sacrificed salary. The ATO states that expenses paid via direct debit from your pay are not salary sacrificed. You can renegotiate at any time subject to your employment contract.
What benefits can I include in a salary sacrifice arrangement?
There is no restriction on the types of benefits, as long as they form part of your remuneration. Common benefits include cars, laptops, and super contributions. However, employer-provided benefits may attract fringe benefits tax (FBT). Your employer may ask you to make employee contributions to reduce FBT. Salary sacrificed super is not a fringe benefit if paid to a complying fund.