Salary sacrifice is one of those financial strategies that sounds complicated but is actually pretty simple once you get your head around it. In a nutshell, it means you agree to take a lower gross salary, and in return, your employer puts the difference towards something beneficial — usually your super fund, but sometimes a car lease, extra leave, or other benefits.
The big advantage? Because the money is redirected before income tax is calculated, you pay less tax. And depending on your situation, the savings can be significant. But it is not a magic trick, and it is not right for everyone. Let us walk through how it works, the numbers, and when it does (and does not) make sense.
How Does Salary Sacrifice Work?
Here is a simple example. Say you earn $90,000 a year. Normally, you would pay income tax on all $90,000 (minus the tax-free threshold). But if you arrange to salary sacrifice $10,000 into your super fund, your taxable income drops to $80,000. You pay less income tax because the ATO sees you as earning $80,000.
The $10,000 that goes into super is taxed at just 15% (the concessional super contribution rate) instead of your marginal tax rate of 30% plus Medicare. So instead of losing $3,200 of that $10,000 to tax, you only lose $1,500. That is a saving of $1,700 per year — and the money is sitting in your super, growing for retirement.
You can see exactly how salary sacrifice affects your take-home pay using our salary calculator — just adjust the salary sacrifice amount and watch the numbers change.
Salary Sacrifice Into Super
The most common form of salary sacrifice is directing extra money into your super fund. This is on top of the 12% Superannuation Guarantee your employer already pays. The combined total (SG + salary sacrifice + any other concessional contributions) must stay within the $30,000 annual concessional contributions cap for 2025-26.
So if your employer's SG contributions are $10,800 per year (12% of $90,000), you have $19,200 of cap space available for salary sacrifice. If you use carry-forward provisions from unused caps in previous years, you might be able to contribute even more.
The tax saving is most significant for people in higher tax brackets. If you are earning over $135,000 (37% marginal rate), every dollar you salary sacrifice into super saves you 22 cents in tax (37% minus 15%). At lower income levels, the saving is smaller but can still be worthwhile. Our superannuation calculator shows how extra contributions today compound into a bigger balance at retirement.
Division 293 Tax: The High-Income Super Tax
If your income plus concessional super contributions exceed $250,000, you will pay an extra 15% tax on the portion of contributions above that threshold. This is called Division 293 tax, and it effectively doubles the tax rate on those super contributions from 15% to 30%. It does not eliminate the benefit of salary sacrifice entirely, but it does reduce it for very high earners.
Salary Sacrifice for a Car (Novated Lease)
A novated lease is a popular form of salary sacrifice where your employer leases a car on your behalf and deducts the lease payments, running costs, fuel, insurance, and maintenance from your pre-tax salary. Because these payments come out before income tax, you effectively pay for your car with cheaper, pre-tax dollars.
The savings can be substantial — for a car costing around $45,000, a novated lease might save you $3,000 to $5,000 per year in tax depending on your income level. From 2022 onwards, electric vehicles (EVs) have been exempt from Fringe Benefits Tax under the novated lease arrangement, making them particularly attractive.
Our novated lease calculator can help you compare the cost of a novated lease versus buying a car outright, including the tax savings and the impact on your take-home pay. If you are interested in the FBT implications, our fringe benefits tax calculator is also worth a look.
Other Things You Can Salary Sacrifice
Depending on your employer, you might be able to salary sacrifice for:
- Additional annual leave: Some employers let you "buy" extra leave by salary sacrificing a portion of your pay.
- Laptop or portable electronic device: If the device is primarily for work use, it may be FBT-exempt.
- Work-related expenses: Some items that are directly related to your employment can be salary sacrificed.
- Meal entertainment and venue hire: Particularly relevant for employees of hospitals, charities, and other FBT-exempt organisations.
Not-for-profit organisations and public hospitals often have particularly generous salary packaging arrangements, with FBT exemptions that allow employees to salary sacrifice up to $15,900 (or $30,000 for hospital workers) per year for general living expenses like rent, mortgage payments, and credit card bills. This is a massive tax benefit that many eligible workers do not take advantage of.
When Is Salary Sacrifice NOT Worth It?
Salary sacrifice is not always the best option. Here are some situations where it might not make sense:
- You need the cash now. Money in super is locked away until preservation age (generally 60). If you are struggling to cover everyday expenses, reducing your take-home pay is obviously not ideal.
- You are on a low income. If your marginal tax rate is only 16% (income between $18,201 and $45,000), the tax saving from super salary sacrifice is just 1% (16% minus 15%). That is barely worth the paperwork.
- You are close to the contributions cap. If your employer's SG contributions already use up most of the $30,000 cap, there is limited room for salary sacrifice before you risk exceeding the cap and copping excess contributions tax.
- You have HECS-HELP debt. Salary sacrifice into super reduces your taxable income but does NOT reduce your HELP Repayment Income. The ATO adds back reportable super contributions when calculating your HRI, so your HECS repayments stay the same even though your take-home pay is lower. Use our HECS-HELP calculator to check how this affects you.
- You are about to apply for a mortgage. Lenders look at your assessable income when deciding how much to lend you. A lower gross salary (after salary sacrifice) can reduce your borrowing capacity.
How to Set Up Salary Sacrifice
Setting up a salary sacrifice arrangement is straightforward:
- Talk to your HR or payroll department about what salary sacrifice options are available
- Decide how much you want to sacrifice and into which benefit (super, novated lease, etc.)
- Sign a salary sacrifice agreement — this must be done before the income is earned
- Your employer adjusts your pay accordingly from the agreed start date
It is important to note that salary sacrifice is an arrangement between you and your employer — your employer does not have to offer it. Most medium and large employers do, but some smaller businesses may not have the systems in place.
Run the Numbers
The best way to decide whether salary sacrifice is right for you is to compare the numbers side by side. Use our salary calculator to model your current take-home pay, then adjust the salary sacrifice amount to see how it changes. Compare that with the extra super you would accumulate using our superannuation calculator. If the long-term gain outweighs the short-term reduction in your pay packet, it is probably worth doing.
The Bottom Line
Salary sacrifice is one of the most effective legal tax-reduction strategies available to Australian workers. If you are in a 30% or 37% tax bracket and can afford to redirect some of your pay into super or a novated lease, the savings are real and meaningful. But it is not a one-size-fits-all solution — your income, your expenses, your debt situation, and your life stage all matter. Run the numbers, talk to your employer, and make an informed decision.