Salary sacrifice is an excellent way to reduce taxable income while gaining valuable benefits, yet many Australians are unaware of its full potential. By strategically using salary sacrifice, employees can boost their superannuation, access essential services, and even finance work-related expenses in a tax-effective manner.
This guide explains everything you need to know about salary sacrifice in Australia, including how it works, the benefits, and how to use it to your advantage.
Let’s Get Straight to the Point
For those short on time, here’s a quick summary:
- Salary sacrifice allows employees to redirect part of their pre-tax salary to benefits such as superannuation, novated car leases, and work-related expenses.
- It reduces taxable income, which lowers the amount of tax paid.
- Employers may benefit from lower payroll tax and superannuation contributions.
- Not all salary sacrifice options are tax-effective—some benefits attract Fringe Benefits Tax (FBT).
- Employees must ensure that sacrificing salary doesn’t lower their take-home pay.
- Superannuation is the most popular salary sacrifice option, which helps grow retirement savings while reducing tax liabilities.
What Is Salary Sacrifice?
Salary sacrifice is an arrangement between an employer and an employee where the employee agrees to receive less cash salary in return for non-cash benefits.
Since the sacrificed amount is deducted before tax, it reduces the employee’s taxable income, leading to lower income tax payments.
How Does Salary Sacrifice Work?
- Agreement with Employer – The employee and employer agree on a salary sacrifice arrangement outlining the benefit chosen.
- Salary Reduction – The employer deducts the agreed amount from the employee’s pre-tax earnings before calculating tax.
- Receiving the Benefit – The employee gets the chosen benefit (e.g., superannuation, a car lease, or childcare) instead of receiving that portion as salary.
Example:
If an employee earning $90,000 sacrifices $10,000 into their superannuation, their taxable income reduces to $80,000, leading to lower tax obligations.
Best Salary Sacrifice Options for Australians in 2025
Not all benefits are treated equally under salary sacrifice arrangements. Some attract Fringe Benefits Tax (FBT), while others provide maximum tax savings.
1. Superannuation Contributions
Superannuation salary sacrifice is one of the most tax-effective options. Contributions are taxed at 15% instead of the employee’s marginal tax rate (which could be up to 45%), making it an excellent strategy for long-term wealth accumulation.
Superannuation Contribution Limits
- Concessional contribution cap: $30,000 per year (increased from $27,500 in 2024).
- Excess contributions: Any amount above the cap is taxed at the individual’s marginal tax rate.
- Employees can use the carry-forward rule, which allows them to use unused concessional caps from the previous five years (if their super balance is below $500,000).
Best for: Employees looking to grow retirement savings while reducing taxable income.
Avoid if: You need high take-home pay for immediate expenses.
2. Novated Car Lease
A novated lease allows employees to pay for a car using pre-tax earnings. The lease includes running costs such as fuel, maintenance, and registration, saving employees thousands in tax.
Novated Lease Benefits
- Reduces taxable income.
- Includes all vehicle expenses in a single payment.
- Avoids GST on the purchase price of the vehicle.
Best for: Employees who drive regularly and want tax-efficient vehicle financing.
Avoid if: You rarely drive or prefer buying vehicles outright.
3. Work-Related Expenses
Employees can salary sacrifice specific work-related expenses, provided they are directly related to their job.
Eligible Work Expenses
- Laptops and electronic devices (for work use).
- Professional memberships and subscriptions.
- Self-education expenses (courses related to job skills).
- Home office equipment (only if required by the employer).
Best for: Professionals who require work-related tools or training.
Avoid if: The employer already covers these costs.
4. Childcare Fees (Workplace Childcare)
Some employers offer salary sacrifice for childcare costs, known as the workplace nursery scheme. This allows parents to pay for childcare directly from their pre-tax salary.
Best for: Parents looking to save on childcare costs.
Avoid if: Your employer does not offer this benefit.
Salary Sacrifice and Tax: What You Need to Know
Salary sacrifice reduces taxable income, but it’s important to consider tax rules and limits.
Income Tax Savings
- Reducing taxable salary lowers the amount of income tax paid.
- For employees in the 37% tax bracket, sacrificing $10,000 could result in $2,200 tax savings.
Fringe Benefits Tax (FBT)
Some salary sacrifice benefits attract Fringe Benefits Tax (FBT), meaning they cost the employer extra.
FBT-Exempt Benefits
- Superannuation contributions
- Laptops and work-related tools
- Portable electronic devices
FBT-Affected Benefits
- Cars (unless novated lease)
- Gym memberships
- Entertainment benefits
How to Avoid FBT Issues
- Stick to FBT-exempt benefits.
- Ask your employer if they absorbs the FBT cost.
- Check for tax-effective alternatives (e.g., using pre-tax deductions instead of salary sacrifice).
Who Benefits Most from Salary Sacrifice?
Salary sacrifice is not for everyone, but it is highly beneficial for:
- High-income earners – Reduces taxable income and lowers high tax obligations.
- Employees close to retirement – Boosts superannuation savings with tax advantages.
- Workers who need job-related equipment – Reduces upfront costs on work essentials.
- Employees planning to finance a vehicle – Tax-effective way to purchase and run a car.
Avoid salary sacrifice if:
- You are earning close to the minimum wage (it could drop your pay below legal limits).
- You need high take-home pay for daily expenses.
- The benefit attracts FBT, negating potential tax savings.
Steps to Set Up Salary Sacrifice
Setting up salary sacrifice is simple, but careful planning ensures you get the most benefit. Follow these steps to get started.
1. Check Eligibility
Not all employers offer salary sacrifice, so confirm with HR or payroll:
- Which benefits are available (e.g., super, novated lease, work expenses).
- Who covers Fringe Benefits Tax (FBT)—some employers pass this cost to employees.
- Preferred providers for benefits like novated leases or tech purchases.
2. Choose a Benefit
Pick a tax-effective option based on your goals:
- Superannuation – Ideal for long-term savings and reducing tax.
- Novated Lease – Great for car ownership with tax savings.
- Work Expenses – Best for laptops, tools, or professional training.
- Childcare Fees – Useful for parents using workplace nurseries.
3. Review Tax Implications
Understand potential tax impacts before proceeding:
- Super cap for 2025 is $30,000—exceeding it means extra tax.
- FBT applies to some benefits, reducing savings.
- Sacrificing too much salary may affect take-home pay or Centrelink benefits.
4. Sign an Agreement
Your agreement should outline:
- How much you’ll sacrifice per pay and for how long.
- Employer conditions, especially for leased vehicles or tech purchases.
- Start date—salary sacrifice can’t usually be backdated.
5. Monitor Contributions
Track your salary sacrifice to stay within tax limits and adjust as needed.
- Check super caps annually to avoid extra tax.
- Review employer policies and tax rules for changes.
- Assess financial goals to ensure salary sacrifice still benefits you.
By following these steps, you can maximise tax savings while avoiding common pitfalls.
Common Salary Sacrifice Mistakes to Avoid
Salary sacrifice can be highly beneficial, but common mistakes can reduce its effectiveness. Here’s how to avoid costly errors.
1. Sacrificing Too Much Salary
Sacrificing too much can leave you with insufficient take-home pay for daily expenses.
Solution: Stick to 10-20% of your salary, ensuring you can cover rent, bills, and essentials.
2. Exceeding Super Contribution Caps
The 2025 concessional cap is $30,000. Contributions above this are taxed at your marginal rate, reducing benefits.
Solution: Track all super contributions and use the carry-forward rule if your balance is under $500,000.
3. Ignoring Fringe Benefits Tax (FBT) Rules
Some benefits attract FBT, which can cancel out tax savings.
Solution: Choose FBT-exempt benefits like super, work expenses, and laptops. Always check employer policies.
4. Not Reviewing the Arrangement Regularly
Salary increases or tax changes can impact salary sacrifice effectiveness.
Solution: Review your arrangement annually to adjust for new caps, salary changes, or financial goals.
By avoiding these mistakes, you can maximise savings and tax benefits without unexpected financial setbacks.
Conclusion
Salary sacrifice is a smart way to save on tax and increase benefits in Australia. Whether boosting superannuation, leasing a car, or funding work expenses, it offers a tax-efficient way to manage finances.
However, it’s essential to choose benefits wisely, avoid FBT traps, and ensure you’re not sacrificing too much income. By planning carefully and reviewing arrangements regularly, Australians can make the most of salary sacrifice.
The concessional contributions cap for superannuation in 2025 is $30,000 per year. If you haven’t used your full cap in the last five years and have a super balance below $500,000, you can carry forward unused amounts to maximise tax benefits.
Depending on your employer's payroll system, most salary sacrifice arrangements can be set up within one to two pay cycles. However, checking with your HR or payroll department for specific processing times is best.
It depends on how much you sacrifice. While salary sacrifice reduces taxable income, leaving enough take-home pay for daily expenses is important. Always review your budget before committing to a salary sacrifice arrangement.
If you exceed the superannuation concessional cap, the excess amount is taxed at your marginal rate. For other benefits, excessive salary sacrifice could lower your income below the minimum wage, making you ineligible for government benefits like Centrelink payments.
No, only FBT-exempt benefits like superannuation, laptops for work, and novated leases offer full tax benefits. Other benefits, like gym memberships and entertainment, may attract Fringe Benefits Tax (FBT), reducing potential savings.
