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How Does Salary Packaging Work? Your Pay on the Australian Salary Index
Learn how does salary packaging work and how it affects your position on the Australian salary index. Understand the impact on take-home pay and tax.
Salary packaging does not change your gross ordinary-time earnings used in the salary index, but it can increase your take-home pay by reducing taxable income.
How Does Salary Packaging Work?
Salary packaging, also known as salary sacrifice, is an arrangement where you agree to give up part of your pre-tax salary in exchange for benefits provided by your employer. These benefits can include a car, extra super contributions, or work-related equipment. The key is that the packaged amount is taken from your gross pay before tax is calculated, which can reduce your taxable income and increase your take-home pay.
In Australia, salary packaging is common in the not-for-profit, health care, and education sectors, but many private-sector employers also offer it. The rules are set by the Australian Taxation Office (ATO) and may be limited by your award or enterprise agreement.
How Does It Relate to the Salary Index?
The Salary Index measures your gross annual ordinary-time earnings against the national line of $108,352 (index 100). This gross figure is your pay before any salary sacrifice. So if you earn $80,000 gross and package $10,000, your index remains 73.8 (80,000 ÷ 108,352 × 100). The packaging does not change your index number because the index uses the pre-sacrifice amount.
However, salary packaging can significantly affect your net income. For example, a health care worker on the industry average index of 97.8 (about $106,000 gross) could package a car or extra super and reduce their taxable income to, say, $96,000. At the 2026–27 tax rates, that saves around $3,000 in tax plus Medicare levy. Your index stays at 97.8, but your take-home pay is higher than someone on the same gross without packaging.
Where Does Your Pay Sit?
To see where your pay sits on the index, compare your gross annual earnings to the national line. The pay guides can help you understand typical rates for your industry. For instance:
- National minimum wage: $52,255 annualised, index 48.2. Salary packaging is rare at this level because the base is low.
- Retail trade average: index 75.9 (about $82,200). Packaging might be limited to super contributions.
- Professional, scientific and technical services: index 114.7 (about $124,300). Packaging is more common, especially for cars and super.
- Education and training: index 105.5 (about $114,300). Teachers often package laptops or additional super.
Your own index may differ based on your award classification, experience, and location. Check the states page for regional benchmarks.
Tax and Super Considerations
Salary packaging interacts with tax and super. The ATO allows you to package certain items without fringe benefits tax (FBT) if they are exempt, like work-related tools or super contributions above the compulsory 12% super guarantee. From 1 July 2026, the super guarantee is 12% on earnings up to $270,830. Packaging extra super can be a smart way to boost retirement savings while reducing your current tax.
Remember that packaging may affect your entitlement to the Medicare levy reduction or the Medicare levy surcharge. It can also reduce your reported gross for things like income protection or loan applications. Always get advice from a tax professional.
How to Get Started
If your employer offers salary packaging, you typically sign a agreement that specifies the benefit and the amount sacrificed. The employer then deducts the packaged amount from your gross pay before calculating PAYG tax. Your pay slip will show the deduction.
For more details, explore the topics page on salary packaging and the how the index works page to understand your pay position. The Fair Work Ombudsman and ATO provide official guidance.
Example: A Nurse on the Health Care Index
A registered nurse earning $100,000 gross has an index of 92.3 (100,000 ÷ 108,352 × 100). If they salary-sacrifice $15,000 into super, their taxable income drops to $85,000. At 2026–27 rates, they pay about $5,092 less in tax and Medicare levy (30% bracket savings). Their net pay increases by roughly $290 per fortnight, while their index remains 92.3.
This shows how salary packaging can improve your financial position without changing your standing on the national salary index.
Key Takeaways
- Salary packaging reduces taxable income, not your gross index number.
- Your index is based on pre-sacrifice earnings, so it stays the same.
- Common in health, education, and not-for-profit sectors.
- Always check your award and tax situation before packaging.
Questions people ask
Does salary packaging affect my salary index number?
No. The salary index uses your gross ordinary-time earnings before any salary sacrifice or packaging. So your index number stays the same regardless of how you package your pay. For example, a teacher earning $90,000 gross has an index of about 83.1, even if they salary-sacrifice a car or extra super.
Can salary packaging increase my take-home pay?
Yes. By reducing your taxable income, salary packaging can lower the amount of tax and Medicare levy you pay. For instance, if you earn $80,000 and package $10,000 into super, your taxable income drops to $70,000, saving you up to $3,000 in tax (depending on your bracket). Your net pay rises even though your gross index stays the same.
What types of salary packaging are common in Australia?
Common items include cars (novated leases), additional super contributions, laptops and phones, and work-related expenses. In the not-for-profit sector, employees can also package living expenses up to a cap. Always check your award or employer policy, as some packaging may affect entitlements like leave or super guarantee.