How salary sacrifice affects your take-home pay

How salary sacrifice works

Salary sacrifice – also called salary packaging – is an arrangement where you and your employer agree to reduce your pre-tax salary in exchange for benefits of similar value. Because your taxable income drops, you pay less income tax and Medicare levy. The Australian Taxation Office explains that there is no restriction on the types of benefits you can include, as long as they form part of your remuneration. Common benefits are cars, electronic devices, and super contributions.

Your employer may have to pay fringe benefits tax (FBT) on the benefits they provide. To reduce that FBT, they might ask you to make an employee contribution from your after-tax income. The ATO provides a clear example comparing three scenarios for someone earning $65,000 in 2025–26:

• No salary sacrifice: taxable income $65,000, net disposable income $41,912.
• Salary sacrifice without employee contributions: taxable income $47,647, net disposable income $41,612.
• Salary sacrifice with employee contributions: taxable income $60,855, net disposable income $43,593.

The third scenario shows that making an employee contribution can actually increase your net disposable income, because it reduces the FBT your employer pays and may allow you to sacrifice more efficiently.

Impact on your Medicare levy

The Medicare levy is 2% of your taxable income for most people. If your taxable income falls below the single-person thresholds of $28,011 or $35,013 (the latest published figures), you may pay a reduced rate or none at all. Salary sacrifice can lower your taxable income enough to move you into a lower Medicare levy bracket, but full-time salaries typically exceed those thresholds. The ATO warns that salary sacrifice may also affect the Medicare levy surcharge if you do not have private hospital cover.

Super considerations

Salary sacrificed super contributions are not fringe benefits – they are treated as employer contributions and taxed at 15% inside your super fund, up to the 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 sacrificed amount. This means salary sacrifice into super can be a tax-effective way to boost your retirement savings, especially if your marginal tax rate is higher than 15%.

Is it right for you?

Salary sacrifice is generally more valuable for people on middle to high incomes because their marginal tax rate is higher. For example, someone earning the national minimum wage of $26.44 per hour ($1,004.90 per week, or about $52,255 annually) has a marginal tax rate of 15% plus the 2% Medicare levy. Sacrificing $1,000 would save at most $170 in tax and Medicare – but if the benefit attracts FBT, the saving may be smaller. In contrast, someone on full-time adult ordinary time earnings of $2,083.70 per week (about $108,352 annually) has a marginal rate of 30% plus Medicare, so the same sacrifice could save $320.

Before entering an arrangement, consider the impact on government benefits, child support, and study loan repayments. The ATO notes that salary sacrifice can affect the Medicare levy surcharge and some tax offsets. You cannot claim a tax deduction for expenses your employer pays as part of the package.

For a detailed look at how salary sacrifice changes your take-home pay, see our Take-home pay guide. If you are considering packaging a car or other benefits, the Salary packaging page explains the FBT rules and employee contributions.

Remember: salary sacrifice must be arranged before you earn the income. You cannot sacrifice salary after you have already been paid. The arrangement must be in writing, and you must not have access to the sacrificed amount. If you cash out a benefit, it becomes ordinary salary and is taxed as normal income.

From 1 April 2027, work-related items provided through salary sacrifice will no longer be exempt from FBT, so check with your employer about future changes.

Ultimately, salary sacrifice can boost your net disposable income, but it is not a one-size-fits-all strategy. Use the ATO’s examples and your own marginal tax rate to estimate the benefit, and consider seeking professional advice if your situation is complex.