Salary sacrifice how does it work: what reaches your bank account after tax

Salary sacrifice how does it work

When you hear the term “salary sacrifice” – also called salary packaging – it means you and your employer agree 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 may pay less income tax and Medicare levy. But the amount that actually reaches your bank account depends on the type of benefit, any fringe benefits tax (FBT) your employer pays, and whether you make an employee contribution.

What is salary sacrifice?

Salary sacrifice is an arrangement you enter before you earn the income. You cannot sacrifice salary you have already accrued. The benefit replaces what would otherwise be cash wages. Common benefits include a car, laptop, phone, or additional super contributions. There is no restriction on the types of benefits, but your employer must agree to offer them.

Because the benefit is provided instead of salary, your employer may have to pay FBT on the taxable value of the benefit. FBT is calculated at the highest marginal tax rate (including the Medicare levy), so employers often limit what they offer or ask you to make an employee contribution to reduce their FBT bill.

How salary sacrifice affects your take-home pay

Your take-home pay is what remains after income tax and the Medicare levy are deducted from your taxable income. By sacrificing salary, you lower your taxable income, which can move you into a lower tax bracket or reduce the amount taxed at higher rates.

For example, using the 2026–27 tax rates from Moneysmart:

• $18,201–$45,000: 15c per $1 over $18,200
• $45,001–$135,000: $4,020 plus 30c per $1 over $45,000

If your salary is $65,000 and you sacrifice $17,353 for a car (as in the ATO’s example), your taxable income drops to $47,647. The tax on that is $5,082.10 plus Medicare levy of $952.94 – a total of $6,035.04. Without sacrifice, tax on $65,000 is $10,288 plus $1,300 Medicare = $11,588. So you keep more in your pocket, but you also give up the cash you would have spent on car expenses.

The role of employee contributions

If your employer faces FBT on a benefit, they may ask you to make an employee contribution – an after-tax payment that reduces the taxable value of the benefit. In the ATO’s example, Sam makes a $7,000 employee contribution for the car. This brings the FBT down to nil, and Sam’s net disposable income is actually higher than without packaging ($43,593.40 vs $41,912).

Salary sacrifice and super

Salary sacrificed super contributions are treated as employer contributions, not fringe benefits. They are taxed at 15% inside your super fund, which is usually lower than your marginal rate. However, they count towards 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.

Impact on Medicare levy and government benefits

The Medicare levy is 2% of your taxable income. If your taxable income falls below $28,011 (single), you pay no levy. Between $28,011 and $35,013, you pay a reduced rate (10c per $1 over the lower threshold). Above $35,013, you pay the full 2%. Salary sacrifice can push you below these thresholds, reducing or eliminating the levy.

Salary sacrifice can also affect:

• The Medicare levy surcharge (if you don’t have private hospital cover)
• Study and training loan repayments
• Some tax offsets (like the low-income tax offset)
• Child support and certain government benefits

Key considerations

• You must have a written agreement with your employer before you perform the work.
• You cannot claim a tax deduction for an expense your employer pays via salary packaging.
• From 1 April 2027, work-related items (like laptops and phones) provided through salary sacrifice will no longer be FBT-exempt.
• Always check the net benefit after considering FBT, employee contributions, and any impact on your entitlements.

For more detail, see our guides on Salary packaging and Tax and Medicare. You can also use the Take-home pay calculator to estimate your after-tax income with or without salary sacrifice.