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Smart salary packaging: how it affects your gross pay, super and tax
Smart salary packaging (salary sacrifice) reduces taxable income but affects super, FBT and take-home pay. See how it compares on the Salary Index.
Salary packaging does not change your gross ordinary-time earnings, so your Salary Index remains the same, but it can significantly alter your tax and net disposable income.
What is smart salary packaging?
Smart salary packaging – also called salary sacrificing – is an arrangement where you and your employer agree to reduce your pre-tax salary in exchange for benefits of similar value. The ATO explains that this lowers your taxable income, meaning you may pay less income tax. Common benefits include cars, school fees, childcare, and super contributions. The key is that you must enter the arrangement before you earn the salary, and you cannot access the sacrificed amount.
How salary packaging affects your gross pay and tax
Your gross remuneration (the total value of salary plus benefits) stays the same, but your taxable income drops. The ATO provides a clear example: Sam earns $65,000 a year. Without packaging, his net disposable income is $41,912 after tax, Medicare, and car expenses. With a car benefit and no employee contribution, his net disposable income falls slightly to $41,611.96. But if he makes an employee contribution of $7,000, his net disposable income rises to $43,593.40. The difference comes from reducing the FBT his employer pays, which allows a larger salary sacrifice.
Moneysmart notes that salary packaging is usually more effective for people on middle to high incomes because their marginal tax rate is higher. For example, someone earning $100,000 (index 92.3) could package $15,000 in car expenses, reducing taxable income to $85,000 and saving about $4,500 in tax (depending on the exact rates).
Salary packaging and super
Salary sacrificing into super is a separate category. These contributions are not fringe benefits – they are treated as employer contributions and taxed at 15% inside the fund. They count toward your concessional contribution cap, which is $32,500 for 2026–27 (including your employer's super guarantee). Your employer must still pay the full super guarantee on your original salary. This can be a tax-effective way to boost retirement savings, especially if you are on a higher marginal tax rate.
Where does smart salary packaging sit on the Salary Index?
The Salary Index measures gross ordinary-time earnings before any salary packaging. So if you earn $65,000 a year, your index is about 60.0 (65,000 ÷ 108,352 × 100). Packaging does not change that number – your gross remuneration is still $65,000. However, your take-home pay can be significantly different. The index is a benchmark for comparing typical full-time earnings, not a measure of after-tax income. For more on how the index works, see how the index works.
Considerations and caveats
Most packaged benefits are fringe benefits, and your employer must pay FBT at the top marginal rate plus Medicare levy. To reduce this, employers often ask for employee contributions (after-tax payments). The ATO warns that from 1 April 2027, work-related items provided through salary sacrifice will no longer be exempt from FBT. Also, salary packaging can affect the Medicare levy surcharge, study loan repayments, child support, and some government benefits.
Always check your employer's policy and consider professional advice. The pay guides on this site can help you understand award rates, but salary packaging is a separate negotiation. For state-by-state comparisons of typical earnings, see states.
The bottom line
Smart salary packaging can reduce your tax bill and increase net disposable income, especially if you use employee contributions to manage FBT. It does not change your Salary Index, but it changes how much of your gross pay you keep. Super salary sacrifice is a straightforward way to save for retirement at a lower tax rate. Just be aware of the caps and the upcoming FBT changes.
Questions people ask
How does smart salary packaging affect my super?
If you salary sacrifice into super, those contributions are treated as employer contributions and taxed at 15% inside the fund. They count toward your concessional cap ($32,500 for 2026–27). Your employer must still pay the full super guarantee on your original salary. Salary sacrifice into super is not a fringe benefit, so no FBT applies.
Is salary packaging worth it on a lower income?
Salary packaging is generally more beneficial for people on middle to high incomes because their marginal tax rate is higher, so the tax saving is larger. On lower incomes, the tax saving may be small, and the FBT cost to the employer may make it less attractive. It's wise to use a calculator or seek professional advice.
What happens to FBT with salary packaging?
Most packaged benefits (like cars, school fees, loans) are fringe benefits, and your employer must pay FBT at the highest marginal rate plus Medicare levy. To offset this, employers may ask you to make an after-tax employee contribution, which reduces the FBT they pay. Some benefits (e.g., exempt work-related items) are currently FBT-free, but from 1 April 2027 that exemption will end.