Salary Sacrifice in Australia: How It Works and Is It Worth It? (2025-26)
Published by SWIFT ACCOUNTANTS PTY LTD · Last reviewed
Salary sacrifice is one of the most accessible tax strategies available to Australian employees. By redirecting part of your pre-tax salary into superannuation or approved benefits, you can legally reduce your taxable income, pay less income tax each pay cycle, and build retirement savings faster. This guide explains exactly how it works, who benefits most, and what the numbers look like on real Australian incomes.
What Is Salary Sacrifice?
Salary sacrifice (also called salary packaging) is a formal arrangement between you and your employer where you agree to receive a lower gross salary in exchange for your employer making contributions on your behalf — most commonly into your superannuation fund. Because the sacrifice happens before your income tax is calculated, you never pay income tax on the sacrificed amount at your marginal rate.
The sacrificed amount is instead taxed at 15% inside the super fund as a concessional contribution. For anyone earning above $45,000 per year — where the marginal tax rate is 30% — this means an immediate tax saving of 15 cents in every dollar sacrificed. At the 37% bracket, the saving rises to 22 cents per dollar.
Crucially, salary sacrifice does not change your entitlement to employer Superannuation Guarantee (SG) contributions. Your employer must still pay 12% SG on your full ordinary time earnings (the pre-sacrifice amount) unless your employment agreement specifically links SG to the reduced post-sacrifice salary. Always check your employment contract on this point.
The Concessional Contributions Cap
The Australian Taxation Office limits how much can be contributed to super at the concessional (pre-tax) rate. For the 2025-26 financial year, the concessional contributions cap is $30,000. This cap includes every dollar of pre-tax super: your employer's mandatory 12% SG contributions and any voluntary salary sacrifice you make.
Consider a few practical examples:
- On a $100,000 salary, your employer contributes $12,000 in SG. You have $18,000 of concessional cap remaining for salary sacrifice.
- On a $200,000 salary, the SG contribution is $24,000. Only $6,000 of cap space is left for additional sacrifice.
- On a $50,000 salary, the SG is $6,000. You could sacrifice up to $24,000 more before reaching the cap.
If you exceed the cap, the excess amount is included in your assessable income for the year and taxed at your marginal rate. You receive a 15% tax offset to account for contributions tax already paid, but you also face an excess concessional contributions charge. Staying within the cap is essential.
One planning opportunity worth noting: from 2019-20 the ATO allows individuals with a super balance below $500,000 to carry forward unused concessional cap space from the previous five years. If you have not used your full cap in recent years, you may be able to make a larger catch-up sacrifice in a year when your income is especially high.
How Much Can You Save? (Tax Saving Table)
The following table shows the estimated annual tax saving from sacrificing $5,000 into super, based on the 2025-26 marginal tax brackets. The saving is the difference between your marginal rate and the 15% contributions tax rate.
| Taxable Income Range | Marginal Rate | Annual Tax Saving on $5,000 | Take-Home Reduction |
|---|---|---|---|
| $45,001 – $135,000 | 30% | $750 | -$3,500 take-home |
| $135,001 – $190,000 | 37% | $1,100 | -$3,900 take-home |
| $190,001+ | 45% | $1,500 | -$3,500 take-home |
Take-home reduction = $5,000 sacrifice minus the marginal rate tax saving. The money does not disappear — it goes into your super fund after the 15% contributions tax is deducted, giving you $4,250 in super.
Who Benefits Most?
Salary sacrifice into super is most effective for employees whose taxable income places them in the 30%, 37%, or 45% marginal tax bracket — that is, people earning above approximately $45,000 per year. The higher your marginal rate relative to the 15% contributions tax rate, the greater your annual saving.
At incomes between $18,201 and $45,000, the marginal tax rate is 16%. After accounting for the Low Income Tax Offset (LITO), the effective marginal rate on income around $37,500 is even lower. In these cases, sacrificing into super yields little or no net tax benefit, and locking money away in super until preservation age may not be appropriate for someone who needs cash flow now.
Salary sacrifice is particularly powerful when combined with the carry-forward provisions, or when used strategically in a high-income year — for instance, following a bonus, a large freelance payment, or a capital gain. In those situations you can reduce a large tax liability by redirecting income into super in the same financial year.
How to Set Up Salary Sacrifice
Setting up salary sacrifice is straightforward for employees but requires your employer's agreement and participation. The steps are:
- Request a salary sacrifice agreement from your employer's HR or payroll team. The ATO requires this arrangement to be in place before the income is earned — you cannot retrospectively sacrifice pay you have already received.
- Specify the dollar amount or percentage you want sacrificed each pay period. Be sure to account for your employer's existing SG contributions to ensure you stay within the $30,000 cap.
- Your employer will adjust your gross pay in their payroll system. The sacrificed amount is paid directly to your nominated super fund alongside the regular SG contribution, labelled as an employer contribution.
- On your payment summary or income statement at year end, the sacrificed amount will appear as a reportable employer super contribution (RESC). While it does not count toward your assessable income for tax purposes, it is included in certain income tests — such as the Medicare Levy Surcharge threshold and some government benefits calculations.
The ATO provides detailed guidance on salary sacrificing arrangements at ato.gov.au — Salary Sacrificing Super.
Risks and Considerations
Salary sacrifice is a legitimate and widely used strategy, but it comes with trade-offs you must consider:
Reduced Cash Flow
Your take-home pay will be lower. Even though the tax saving partially offsets the sacrifice, you will have less money available for day-to-day expenses. Before committing to a salary sacrifice arrangement, model your budget carefully. Many people sacrifice too aggressively and then need to access credit to cover living costs — which defeats the purpose.
15% Contributions Tax
All concessional contributions, including salary sacrifice, are taxed at 15% inside the super fund before they are invested. If you sacrifice $5,000, only $4,250 is actually invested. This is still better than paying 30% or 37% on the same amount as income, but it means your super balance does not grow by the full $5,000.
Division 293 Tax for High Earners
If your income plus concessional super contributions exceed $250,000 in a financial year, the ATO applies an additional 15% tax on your contributions under Division 293. This brings the effective tax rate on your super contributions to 30% — the same as the marginal rate on income in that range. Division 293 does not make salary sacrifice harmful at those income levels, but it does reduce the benefit.
Super Is Preserved Until Retirement
Money inside super is locked away until you reach your preservation age (60 for those born after 30 June 1964) and meet a condition of release. If you are young and may need those funds for a house deposit, business investment, or emergency, keeping more money outside super could be the right choice despite the lower tax efficiency.