Salary Sacrifice: How It Works and Where Your Pay Sits on the Australian Salary Index

What is salary sacrifice?

Salary sacrifice is an arrangement where you agree to give up part of your gross salary or wages in exchange for a non-cash benefit provided by your employer. Common benefits include additional superannuation contributions, a car (via novated lease), laptop, phone, or even childcare. The sacrificed amount is deducted from your pre-tax pay, which lowers your taxable income and can reduce the amount of tax you pay. However, it does not change your gross ordinary-time earnings for the purpose of the Salary Index.

How does salary sacrifice affect your salary index?

The Australian salary index measures where your gross full-time adult ordinary-time earnings sit relative to the national line of 100. That line is set at $108,352 per year (based on ABS Average Weekly Earnings, May 2026). Your index is calculated as: (your annual gross ordinary-time earnings ÷ $108,352) × 100. Because salary sacrifice reduces your taxable income but not your gross ordinary-time earnings, your index figure stays the same. For instance, if you earn $130,000 gross (index 120.0) and salary sacrifice $20,000 into super, your index remains 120.0. The index is a benchmark for your pre-sacrifice pay, not your net or taxable income.

Examples of salary sacrifice and the index

Consider a professional earning $150,000 gross. Their index is 138.5 (150,000 ÷ 108,352 × 100). If they salary sacrifice $25,000 for a car and super, their taxable income drops to $125,000, but the index stays 138.5. Now compare someone on the national minimum wage: $26.44 per hour, annualised $52,255, index 48.2. Salary sacrifice is rarely possible here because the cash pay cannot fall below the minimum. The pay guides for awards often specify minimum rates that must be maintained.

Another example: a retail worker earning $60,000 gross (index 55.4) might salary sacrifice a small amount for a phone plan. Their index remains 55.4, but their take-home pay increases slightly because less tax is withheld. The how the index works page explains that the index uses ordinary-time earnings, which are unaffected by salary sacrifice.

Common types of salary sacrifice

• Superannuation: The most popular form. You direct part of your pre-tax salary into your super fund. This boosts your retirement savings and reduces your taxable income. The concessional contributions cap for 2026–27 is $30,000. Your employer still pays the super guarantee (12%) on your ordinary-time earnings, but the sacrificed amount counts towards your total super contributions.
• Novated lease: A car lease where payments come from your pre-tax salary. The lease, fuel, and maintenance costs are deducted before tax, lowering your taxable income. The car is typically used for both work and personal travel.
• Electronic devices: Laptops, tablets, or phones used mainly for work can be salary sacrificed. The benefit must be primarily work-related to be exempt from fringe benefits tax (FBT).
• Other benefits: Some employers offer salary sacrifice for gym memberships, health insurance, or childcare. These may have FBT implications.

Considerations and rules

Salary sacrifice is voluntary and must be agreed in writing with your employer. It cannot reduce your cash pay below the applicable award rate or the national minimum wage. For award-covered employees, the Fair Work Ombudsman requires that the base rate of pay (before any sacrifice) is at least the minimum award rate. The sacrificed amount is not considered wages for super guarantee purposes in some cases, so check with your employer.

Tax savings depend on your marginal tax rate. For the 2026–27 year, resident tax rates are: nil up to $18,200; 15% from $18,201 to $45,000; 30% from $45,001 to $135,000; 37% from $135,001 to $190,000; and 45% above $190,000. Plus a 2% Medicare levy. By reducing your taxable income, you may drop into a lower bracket or reduce the amount taxed at higher rates.

However, salary sacrifice can affect your eligibility for government benefits (e.g., Family Tax Benefit) and the Medicare levy surcharge. Reportable fringe benefits amounts are added to your income for these tests. Also, salary sacrifice into super is subject to the contributions cap; exceeding it incurs additional tax.

Where your pay sits on the index

Your salary index is a snapshot of your gross ordinary-time earnings relative to the national average. Salary sacrifice does not move that number. If you are curious about how your industry or state compares, see the industries and states pages. For example, mining has an index of 154.7, while retail trade is 75.9. A worker in Western Australia (index 106.9) might have a higher gross pay than one in Tasmania (88.6), but salary sacrifice can still be used in any state.

Summary

Salary sacrifice how does it work? It is a way to swap some of your gross salary for a benefit, reducing your taxable income while keeping your salary index unchanged. The index remains a measure of your pre-sacrifice pay, so your position on the national line stays the same. Always check your award or agreement, and consider the caps and FBT rules. For more on pay benchmarks, visit topics.