Understanding salary sacrifice vs salary packaging: what hits your bank account after tax

Salary sacrifice vs salary packaging: what's the difference?

If you've been looking at ways to reduce your tax bill, you've probably come across the terms "salary sacrifice" and "salary packaging". In Australia, they are used interchangeably. The Australian Taxation Office explains that salary sacrificing (also called salary packaging or total remuneration packaging) is an agreement where you receive less pre-tax salary in return for your employer paying for certain benefits of similar value. Moneysmart puts it simply: you package your salary into income and benefits.

Both mean the same thing: you swap some of your gross pay for a benefit, lowering your taxable income. But how does that affect the amount that actually lands in your bank account? Let's break it down.

How salary sacrifice changes your taxable income

When you salary sacrifice, your employer reduces the salary they pay you and instead provides a benefit (like a car, laptop, or super contributions). Your taxable income drops, so you pay less income tax and Medicare levy. However, your employer may have to pay fringe benefits tax (FBT) on most packaged benefits, which is why not all employers offer it and why some benefits are more tax-effective than others.

A worked example from the ATO

The ATO provides a clear comparison for someone named Sam earning $65,000 in 2025–26. Without any packaging, Sam's tax (including Medicare) is $11,588, leaving $53,412. After paying $11,500 in car expenses from after-tax income, Sam's net disposable income is $41,912.

If Sam packages the car without making an employee contribution, the salary sacrifice amount is $17,353, reducing taxable income to $47,647. Tax and Medicare drop to $6,035, but the car benefit is a fringe benefit with a taxable value of $7,000, which is reported on Sam's income statement. Net disposable income is $41,611.96 – slightly worse than no packaging.

But if Sam makes an employee contribution of $7,000 towards the car, the salary sacrifice is only $4,145, taxable income is $60,855, tax and Medicare are $10,261.60, and after the employee contribution, net disposable income rises to $43,593.40. That's $1,681.40 better than no packaging.

This shows that salary sacrifice can boost your take-home pay, but only if structured correctly – often with employee contributions to avoid FBT.

Super salary sacrifice: a popular option

One of the most common forms of salary sacrifice is putting extra into your super. These contributions are taxed at 15% inside the fund, which is lower than most marginal rates. They count towards your concessional contribution cap ($32,500 for 2026–27, including your employer's super guarantee). Your employer must still pay the compulsory 12% super guarantee on your original salary, not the sacrificed amount. This is a tax-effective way to boost retirement savings while reducing your taxable income now.

What about the Medicare levy?

The Medicare levy is 2% of your taxable income. Most full-time employees pay it. However, if your taxable income is below $28,011 (single), you pay no levy. Between $28,011 and $35,013, the levy is phased in at 10 cents per dollar over the lower threshold. Above $35,013, you pay the full 2%. Salary sacrifice can push your taxable income below these thresholds, potentially reducing or eliminating the Medicare levy.

How to estimate your after-tax salary with packaging

To work out what clears after tax, start with your gross salary, subtract any salary sacrifice amount, then apply the 2026–27 tax rates:

• $0 – $18,200: Nil
• $18,201 – $45,000: 15c for each $1 over $18,200
• $45,001 – $135,000: $4,020 plus 30c for each $1 over $45,000
• $135,001 – $190,000: $31,020 plus 37c for each $1 over $135,000
• Over $190,000: $51,370 plus 45c for each $1 over $190,000

Then add the Medicare levy (2% of taxable income, unless you're below the threshold). Don't forget the Low Income Tax Offset (LITO) if your taxable income is under $66,667 – it can reduce your tax by up to $700.

Use our Take-home pay calculator to see the effect of different packaging scenarios. Remember, this is an estimate – your actual tax assessment may differ due to offsets, HELP repayments, or the Medicare levy surcharge.

Key considerations before you start

• You must agree the arrangement before you perform the work.
• You cannot access the sacrificed salary as cash.
• From 1 April 2027, work-related items provided through salary sacrifice will no longer be exempt from FBT.
• Salary sacrifice can affect government benefits, child support, and study loan repayments.
• You cannot claim a tax deduction for expenses your employer pays as part of the package.

For more details, see our guides on Salary packaging and Tax and Medicare.

The bottom line

Salary sacrifice vs salary packaging is really just a naming difference. The real question is whether it leaves you with more money in your bank account. The answer depends on your income, the benefit type, and whether you make employee contributions. Use the ATO's examples and our tools to model your situation before signing up.