Salary sacrifice: how it changes your taxable income and your salary index

What is salary sacrifice?

Salary sacrifice – also called salary packaging – is an arrangement where you and your employer agree that you will receive less pre-tax salary in exchange for certain benefits of similar value. The Australian Taxation Office explains that this reduces your taxable income, which can mean you pay less income tax. The benefits replace what you would otherwise receive as salary.

Common benefits include cars, electronic devices, school fees, childcare costs, and super contributions. Because your taxable income drops, your salary index – your yearly gross divided by the national line of $108,352 (full-time adult ordinary-time earnings) times 100 – also drops. But the real question is whether your net disposable income improves.

How salary sacrifice changes your salary index

Let’s use the ATO’s example for Sam, who earns $65,000 per year. Without any salary sacrifice, Sam’s taxable income is $65,000. That gives a salary index of about 60.0 (65,000 ÷ 108,352 × 100). After tax and Medicare, Sam’s net disposable income is $41,912.

If Sam salary sacrifices a car worth $17,353 (the maximum tax-free amount without employee contributions), taxable income falls to $47,647. The salary index drops to about 44.0. Net disposable income becomes $41,611.96 – slightly less than without sacrifice, because the FBT cost is passed on.

But if Sam makes an employee contribution of $7,000 to reduce the FBT, taxable income is $60,855 (index ~56.2) and net disposable income rises to $43,593.40. That’s $1,681 more than the no-sacrifice scenario. So the salary index is lower, but take-home pay is higher.

Where does salary sacrifice fit on the national line?

The national line (index 100) is $108,352 per year. Most salary sacrifice arrangements are used by people on middle to higher incomes, because the tax savings are larger at higher marginal rates. For someone earning $100,000 (index 92.3), sacrificing $15,000 for a car would bring taxable income to $85,000 (index 78.5). Whether that’s worthwhile depends on the FBT treatment and any employee contributions.

For comparison, the national minimum wage from 1 July 2026 is $52,255 per year, index 48.2. A salary sacrificed income can fall below that line, but your total remuneration (salary plus benefits) is still above it.

Key rules and considerations

• You must enter the arrangement before you perform the work. You cannot sacrifice salary you have already earned.
• Your employer must still pay the full super guarantee (12% from 1 July 2026) on your ordinary time earnings, as if there were no sacrifice.
• Salary sacrificed super contributions are treated as employer contributions and count towards the concessional cap of $32,500 per year.
• From 1 April 2027, work-related items (like laptops and phones) provided through salary sacrifice will no longer be FBT-exempt.
• Salary sacrifice can affect the Medicare levy surcharge, study loan repayments, child support, and some government benefits.

Is salary sacrifice right for you?

The answer depends on your income, the benefits available, and any costs your employer passes on. The ATO and Moneysmart both recommend getting professional tax advice before entering an arrangement. You can also check your industry’s pay guides to see if your award allows salary packaging.

Remember that the salary index is a measure of gross ordinary-time earnings. Salary sacrifice changes the relationship between gross and net. Your index number will fall, but your net disposable income may rise if the benefit is tax-effective. That’s why it’s important to look at the whole picture, not just the index.

For more context on how different states and industries compare, see our states and industries pages. And if you want to understand how the index is calculated, read how the index works.

The bottom line

Salary sacrifice can be a legitimate way to reduce tax and increase net disposable income, especially for middle to high earners. But it lowers your salary index because your taxable income is smaller. The key is to compare net disposable income, not just the index number. Use the ATO’s example as a starting point and talk to a tax professional to see if it works for your situation.