What is salary packaging and how does it affect your take-home pay

What is salary packaging?

Salary packaging, also known as salary sacrificing or total remuneration packaging, is a way to reduce your taxable income by swapping part of your salary for benefits. The Australian Taxation Office explains that you and your employer agree for you to receive less income before tax, and in return your employer pays for certain benefits of similar value. This means you pay less tax on your income, but the benefits replace what you would otherwise receive as salary.

There is no restriction on the types of benefits you can include, as long as they form part of your remuneration. Common examples include a car, phone, childcare, or additional super contributions. You must enter the arrangement before you perform the work, and you cannot access the sacrificed salary later.

How salary packaging changes your take-home pay

Your take-home pay is what reaches your bank account after income tax and the Medicare levy. Salary packaging reduces your taxable income, so you move into a lower tax bracket or pay less tax within your bracket. For example, using the 2026-27 tax rates, if your taxable income drops from $65,000 to $47,647, your income tax falls from $10,288 to $5,082 (excluding Medicare). The Medicare levy also drops from $1,300 to $953.

However, you must consider the cost of the benefit and any employee contributions. The ATO provides a comparison table showing that with a car benefit and employee contributions, your net disposable income can actually increase compared to paying for the car yourself with after-tax dollars.

The role of the Medicare levy

The Medicare levy is 2% of your taxable income. For the 2026-27 year, the latest published single-person thresholds are $28,011 and $35,013. If your taxable income after salary packaging falls below $28,011, you pay no Medicare levy. Between $28,011 and $35,013, you pay a reduced rate (10 cents per dollar over the lower threshold). Above $35,013, you pay the full 2%. Salary packaging can help you stay under these thresholds if your original salary is just above them.

Super and salary packaging

Salary sacrificed super contributions are considered employer contributions and are not fringe benefits if paid to a complying super fund. They are taxed at 15% inside super, which is often lower than your marginal rate. But remember, these contributions count towards the concessional cap of $32,500 per year (including your employer's super guarantee). Going over the cap may incur extra tax.

Your employer must still pay the super guarantee on your original salary, so you get additional super on top of your sacrificed amount. This can boost your retirement savings.

Important considerations

• You cannot claim a tax deduction for an expense your employer pays as part of your package.
• From 1 April 2027, work-related items provided through salary sacrifice will no longer be exempt from FBT.
• Salary packaging may affect government benefits, child support, and study loan repayments.
• Always check with your employer what benefits they offer and whether the arrangement is cost-effective.

For more details, see our Salary packaging guide and Tax and Medicare page.