Salary Sacrifice Explained: How Does It Reduce Tax?

Salary sacrificing into super is one of the few genuinely legal, straightforward ways to reduce your tax bill — but most explanations only tell half the story. Here's the full mechanics of how it works, and where the limits are.

The Basic Idea

Salary sacrifice means agreeing with your employer to redirect part of your pre-tax salary into your superannuation fund, instead of receiving it as regular pay. Because the money is diverted before income tax is calculated, it never counts as part of your taxable income for the year — it's taxed instead at the flat rate that applies inside super.

Why It Actually Saves Money

Ordinary salary is taxed at your marginal rate — up to 45% for high earners. Money sacrificed into super is instead taxed at a flat 15% contributions tax within the fund. For anyone on a marginal rate above 15% (which is most people earning above the tax-free threshold), that gap is where the saving comes from.

The higher your marginal rate, the bigger the gap — which is why salary sacrifice is often recommended more strongly for middle-to-high income earners than for those near the tax-free threshold.

The Medicare Levy Saving Most People Miss

Because salary sacrifice reduces your taxable income, it also reduces the 2% Medicare Levy calculated on that lower amount — an extra saving that many simple explanations leave out entirely, focusing only on the income tax component.

The Concessional Contributions Cap

You can't sacrifice unlimited amounts. The concessional contributions cap for 2025-26 is $30,000 per year — and critically, this cap includes everything going into your super at the concessional (pre-tax) rate, not just what you personally sacrifice. Your employer's compulsory Super Guarantee (12%) contributions count toward the same $30,000 limit.

This means the room you actually have available for salary sacrifice is $30,000 minus whatever your employer already contributes — for someone on $90,000, that's roughly $30,000 − $10,800 (12% SG) = about $19,200 of remaining room.

Contribute more than the cap, and the excess loses its tax advantage — it's added back to your assessable income and taxed at your marginal rate, plus an excess concessional contributions charge on top.

Division 293 Tax — A Catch for High Earners

If your combined income and concessional contributions exceed $250,000 in a year, an additional 15% Division 293 tax applies to contributions above that threshold — stacking on top of the standard 15% contributions tax, for an effective 30% rate on the affected portion. It still beats paying tax at 45%, but it meaningfully narrows the benefit for very high earners.

Worked Example

A resident earning $85,000, salary sacrificing $8,000 into super:

That's $1,360 that would otherwise have gone to tax, redirected into retirement savings instead — on top of the $8,000 itself, which is now growing inside super rather than sitting in a bank account.

The Tradeoff: Your Money Is Locked Away

Salary sacrifice isn't free money — the amount goes into superannuation, which is subject to preservation rules. Generally, you can't access it until you reach your preservation age and meet a condition of release (typically retirement). This makes salary sacrifice better suited to money you genuinely don't need before then, not a substitute for an accessible emergency fund.

Frequently Asked Questions

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