Written by:
Joel Simmonds
Head of Advice
Imagine saving on taxes while funding your retirement, leasing a car, or even reducing your living expenses — all by making better use of your pre-tax salary. Salary sacrificing, sometimes referred to as “salary sacrifice,” is a tool that allows you to reduce your taxable income while accessing perks that align with your financial goals. But what is it exactly, and how can you use it to your advantage? Let’s break it down.
Salary sacrificing is an arrangement where you and your employer agree to redirect part of your pre-tax income towards certain benefits. These benefits can include additional superannuation contributions, leasing a car, or even paying for work-related expenses. The advantage? You reduce your taxable income, which means paying less tax.
In Australia, salary sacrificing is widely used, particularly for superannuation and novated car leases. It’s worth considering for anyone looking to maximise their income and benefits.
The process of salary sacrificing starts with an agreement between you and your employer. You nominate a portion of your pre-tax income to go directly towards certain benefits, such as super contributions or a car lease.
Example: If your annual income is $80,000 and you salary sacrifice $10,000 towards super, your taxable income becomes $70,000. This could mean paying less tax while increasing your super balance.
It’s important to note that not all benefits are treated the same — some may attract fringe benefits tax (FBT), while others, like super contributions, don’t.
Salary sacrificing offers numerous benefits, including:
For many, the question is whether it’s worth it. When used strategically, salary sacrificing can be a powerful financial tool.
While salary sacrificing offers many perks, it’s essential to understand Fringe Benefits Tax (FBT) and how it affects your arrangements.
FBT is a tax employers pay on certain benefits provided to employees (or their associates) instead of salary. While the employer pays FBT, the cost often flows through to employees as part of their package.
Certain items, like super contributions and work-related devices, are exempt from FBT, making them highly beneficial for salary sacrificing.
Understanding FBT ensures you can make the most of your salary sacrifice while avoiding unexpected costs.
Salary sacrificing isn’t limited to superannuation or cars. Common options include:
Leasing a car through salary sacrificing — known as novated leasing — is one of the most popular options. But is salary sacrificing a car worth it? Let’s explore.
Your employer deducts lease payments, fuel, insurance, and maintenance costs from your pre-tax income. These deductions lower your taxable income.
Example:
By salary sacrificing, these costs reduce your taxable income, saving you thousands in tax.
Who Benefits?
Daniel, a marketing manager, drives 15,000 km annually. Using a novated lease, he saves $5,000/year compared to buying outright. For Daniel, it’s worth it.
When Isn’t It Worth It?
If you drive very little or are in a lower tax bracket, the savings might not justify the costs, especially with FBT.
Salary sacrificing can extend beyond cars and superannuation. Here’s how employees can make the most of it:
Salary sacrificing into superannuation is one of the most tax-effective ways to build long-term wealth. For most Australians, super contributions are taxed at a concessional rate of 15%, making it a powerful way to save while reducing your taxable income.
When you contribute to super through salary sacrificing, you pay just 15% tax on those contributions instead of your marginal tax rate, which could be as high as 47%. This tax saving can make a significant difference, especially for high-income earners.
Example: Tax Savings Through Super Contributions
Jane earns $90,000 annually. By sacrificing $10,000 of her pre-tax income into super:
What to Watch Out For
Is Salary Sacrificing Super Worth It?
For high-income earners or those close to retirement, salary sacrificing super is often a no-brainer. However, younger workers or those in lower tax brackets should weigh the benefits of long-term savings against short-term financial needs.
If you have a HECS or HELP debt, salary sacrificing can impact your repayments in ways you might not expect. While salary sacrificing reduces your taxable income for tax purposes, your HECS repayments are based on your pre-sacrifice income. This can result in higher repayment amounts.
HECS repayment thresholds are based on your “repayment income,” which includes:
For example, if your salary is $85,000 and you salary sacrifice $10,000 into super, your taxable income drops to $75,000. However, your HECS repayment rate will still be calculated based on the original $85,000.
This is particularly important for:
The ultimate question: Is salary sacrificing worth it? The answer depends on your financial situation, goals, and priorities. Here’s a closer look at when it works — and when it doesn’t.
Ellie earns $100,000 annually and is deciding whether to salary sacrifice $20,000 into super. While this would save her $6,400 in taxes, she realises she needs more cash flow to cover immediate expenses. Instead, she sacrifices $10,000, balancing tax savings with short-term needs.
Salary sacrificing can feel overwhelming if you’re not familiar with all the details. Below are some of the most common questions answered in plain language, with examples to make it easier to understand.
Yes, certain benefits you salary sacrifice — like cars or parking — are considered fringe benefits. These are subject to Fringe Benefits Tax (FBT), which is paid by your employer. However, some benefits, like super contributions, are FBT-exempt.
Example:
Leasing a car through salary sacrificing is a fringe benefit, so your employer may calculate the FBT as part of the package. This means the tax savings might be reduced by the cost of the FBT.
It depends. Some employers, particularly in the not-for-profit or government sectors, allow salary sacrificing for rent or mortgage payments. This is more common for employees in remote or regional areas.
Example:
Sophie, a teacher in a remote Queensland town, uses salary sacrificing to pay for her rent. This reduces her taxable income and makes her housing costs more manageable. If you’re in a similar situation, check if your employer offers this benefit.
Salary sacrificing reduces your taxable income, which can result in paying less tax overall. For example, if you’re in the 32.5% tax bracket and sacrifice $10,000 into super, that $10,000 is only taxed at 15%, saving you $1,750 in tax.
Important Note: While salary sacrificing reduces your taxable income, it doesn’t necessarily reduce other obligations like HECS repayments. Your HECS repayment income is still calculated based on your pre-salary-sacrifice income.
Salary sacrificing a car can be worth it if you:
Example:
John, a sales manager, drives 20,000 km a year for work. By salary sacrificing his car, he saves $4,500 annually compared to paying for the car and running costs out of pocket. However, someone who drives very little might not see the same value.
There are online salary sacrifice calculators that can help estimate how much tax you’ll save and how much your take-home pay will be reduced. Be sure to:
While salary sacrificing has many advantages, there are some downsides:
Salary sacrificing is one part of a salary packaging arrangement. Salary packaging refers to a broader agreement where an employee can allocate pre-tax income towards multiple benefits, such as:
Example:
Alice works for a hospital that offers salary packaging. She allocates part of her pre-tax income for her super, car lease, and parking fees, which reduces her taxable income significantly.
No, salary sacrificing is only available to employees. However, self-employed individuals can make tax-deductible personal contributions to superannuation, which works in a similar way by reducing taxable income.
Salary sacrificing is a powerful strategy for reducing taxes and achieving your financial goals. Whether it’s boosting your super, leasing a car, or investing in professional development, understanding how salary sacrificing works can help you make informed financial decisions.
Speak with your employer or a financial advisor to explore your options and see how salary sacrificing can work for you.
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General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.
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