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How does salary sacrifice into super work, and is it worth it?

13 minutes| May 14 2026

How does salary sacrifice into super work, and is it worth it?

The amount you can put into super from your before-tax pay went up on 1 July. Most people who salary sacrifice haven't touched their payroll instruction since they set it. Here's how the strategy actually works, who it suits, and how to land on a number that won't squeeze your household budget.

By Paul Feeney, Founder and Chief Executive Officer, Otivo

On 1 July 2026, the annual limit on before-tax super contributions rose from $30,000 to $32,500. It was the first increase in two years and it happened quietly, the way indexation usually does. No letter arrived. No payroll form was reissued.

That's the quiet problem with salary sacrifice. It's a set-and-forget arrangement sitting inside a system that keeps moving. The instruction you signed two years ago is still doing exactly what you told it to do, which may no longer be what you'd choose today. For some people that means $2,500 of before-tax room going unused this year. For others, it's the opposite problem — a number set when the mortgage was smaller and the kids weren't in school.

Either way, it's worth understanding what the strategy is actually doing to your pay and your tax before you decide whether the number is still right.

The basic idea, and why the tax works out

Salary sacrifice is a formal agreement between you and your employer. Instead of paying part of your wage to you, your employer pays it straight into your super fund. The arrangement has to be set up before you earn the money, never after the fact.

What lands in super is called a concessional contribution. Your fund pays 15% tax on it as it arrives. That's the whole mechanism. Money you never received as wages is taxed at 15% instead of at your marginal income tax rate.

One important qualification before we go any further. That 15% is the standard rate, not a universal one. If your income plus your concessional contributions tops $250,000 in a financial year, an additional 15% applies to the contributions above that line under Division 293 tax, so the effective rate on those contributions is 30% rather than 15%. Everything that follows assumes the standard 15% unless stated otherwise, and the Division 293 detail is set out further down.

So the question that matters is simple. What's your marginal rate?

The Medicare levy of 2% applies on top for most people.

If you earn $80,000, every extra dollar of wage is taxed at 30% plus the 2% levy. Divert that dollar into super instead and it's taxed at 15%. That gap is the benefit, and it's the reason the strategy exists.

If you earn $40,000, the picture changes completely. Your marginal rate is already 15%, the same as the contributions tax. There's no income tax advantage at all. The only saving is the 2% Medicare levy, because sacrificed amounts aren't counted in that calculation. Locking money away until you're 60 for a 2% saving is a very different proposition, and for most people on that income it isn't the right call.

This is where a lot of general advice goes wrong. Salary sacrifice isn't good or bad. It's a tax arbitrage, and the size of the gap depends entirely on what you earn — including at the top end, where Division 293 narrows it.

How much room do you actually have?

Here's the part people underestimate. The $32,500 cap isn't $32,500 of salary sacrifice. It's a combined cap covering three things at once.

  • Employer super guarantee, currently 12% of your wage
  • Salary sacrifice
  • Personal contributions you claim as a tax deduction

Your employer's compulsory contributions come out of that cap first. Someone earning $100,000 already has $12,000 of SG going in, leaving $20,500 of room. Someone earning $270,000 or more has almost no room at all, because SG alone fills the cap.

The cap moves in $2,500 steps, indexed to wages growth, which is why it doesn't rise every year.

Some people have considerably more room than the annual figure suggests. If your total super balance was under $500,000 at the previous 30 June, you may be able to carry forward unused cap from the past five financial years. For 2026–27 that means unused amounts from 2021–22 onwards. Anything left over from 2020–21 expired on 30 June 2026. This matters most for people who took time out of paid work, ran a business through lean years, or simply never got around to contributing.

The catches worth knowing about

Going over the cap isn't a catastrophe, but it is administratively annoying. The excess gets added to your assessable income and taxed at your marginal rate, with a 15% offset for tax the fund already paid. The extra charge that used to apply on top of this was removed for contributions made from 1 July 2021. You can elect to release up to 85% of the excess from super, and anything you leave in there counts towards your after-tax contributions cap, which can create a second problem.

Then there's Division 293, flagged earlier. If your income plus concessional contributions tops $250,000 in a year, an additional 15% applies to the contributions above that line, taking the rate on them to 30%. That threshold hasn't moved since 2017 and isn't indexed, so wages growth keeps drawing more people into it. Even at 30%, contributions still beat a 45% marginal rate plus the Medicare levy. The advantage is just smaller than people assume, and it's worth calculating rather than eyeballing.

From this financial year there's also Division 296, introduced by the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026 and effective from 1 July 2026. It applies an additional 15% to realised earnings attributable to the portion of a total super balance between $3 million and $10 million, and an additional 25% to the portion above $10 million. Both thresholds are indexed, in $150,000 and $500,000 steps respectively. It's a personal tax rather than a fund tax, it captures realised earnings rather than paper gains, and it's estimated to affect around 90,000 Australians. Anyone near those thresholds should factor it in before adding more.

Then there are the two constraints that have nothing to do with tax.

The first is cash flow. Salary sacrifice reduces your take-home pay, and it does so every single pay cycle. Plenty of people set an ambitious number in a good month and quietly regret it by the time the car needs tyres.

The second is access. Money in super is generally locked away until preservation age, which is 60 for anyone working today. It is not an emergency fund, and it cannot be unwound.

One smaller thing worth confirming with your fund — some funds reduce or cancel insurance cover if an account becomes inactive. Salary sacrifice doesn't usually trigger this, but a quick call is cheaper than finding out later.

So who does it actually suit?

The situations where it tends to stack up include the following.

  • Earning above $45,000, where the 30% marginal rate sits well clear of the 15% contributions tax
  • Stable income and no high-interest debt
  • Unused carry-forward cap that's approaching expiry
  • Retirement close enough that locking money away isn't a hardship

The situations where it often doesn't.

  • Tight cash flow alongside credit card or personal loan debt
  • Income under the tax-free threshold, where there's no income tax to reduce
  • Income between $18,201 and $45,000, where the marginal rate already matches the contributions tax
  • Any realistic chance of needing the money before 60

Above $250,000 the strategy still works, but at a narrower margin once Division 293 applies, so the numbers deserve a closer look rather than an assumption.

Otivo, holder of AFSL and Australian Credit Licence No. 485665, has a salary sacrifice contributions module that models what a sensible amount looks like for your situation. It factors in income, age, employer contributions, retirement age, household expenses, and the contribution limits.

What it looks like in practice

Consider Sarah, 45, earning $120,000. Her marginal rate is 30% plus the 2% levy. Her employer pays $14,400 in SG, which is 12% of her wage, leaving $18,100 of room under the $32,500 cap.

She sacrifices $1,500 a month, or $18,000 across the year, keeping a small buffer for timing differences. Her taxable income drops to $102,000. That $18,000 would have been taxed at 30% plus the levy as wages. Inside super it's taxed at 15%, and because her income plus contributions sits well under $250,000, Division 293 doesn't come into it. The rest goes to work in her fund for the next fifteen years.

The exact dollar saving depends on Sarah's full tax position, and her situation won't be identical to yours. The point of the example is the shape of the decision, not the number.

Setting it up, and one thing to check

The process is short. Four steps, usually.

  • Talk to your employer or payroll team about the option
  • Agree the amount and frequency in writing, before any wage is earned
  • Choose between a fixed dollar amount or a percentage of pay
  • Check the first few pay slips to confirm the money is flowing

The written agreement has to come before you earn the income. A back-dated arrangement won't qualify. Some employers have a form for this, others accept an email.

The thing to check is how your SG is calculated. By law, employer SG must be paid on your full pre-sacrifice wage. A loophole that let some employers count sacrificed amounts towards their SG obligation was closed on 1 January 2020, but it's still worth reading the pay slip.

You should also find it easier to keep track from here. Payday super started on 1 July 2026, so employers now pay SG at the same time as wages rather than quarterly, with contributions generally reaching the fund within seven business days. More frequent payments give you far better visibility, and they also change the timing of when contributions count towards your cap, so keep an eye on the running total across the year. You can read more in our payday super guide.

Frequently asked questions

Can you change or stop salary sacrifice at any time?

Most employers let you vary or stop the arrangement. Any change applies to future pay only, never to wages already earned. Check your written agreement and your employer's payroll cut-off dates.

Does salary sacrifice reduce employer super contributions?

It shouldn't. Employer SG must be calculated on your full pre-sacrifice wage. If a pay slip suggests otherwise, raise it with payroll.

Is the contributions tax always 15%?

For most people, yes. The exception is Division 293. If your income plus your concessional contributions exceeds $250,000 in a financial year, an additional 15% applies to the contributions above that threshold, so the rate on those contributions becomes 30%. The ATO assesses this separately and sends the bill to you, not to your fund, and you can choose to pay it personally or release the money from super.

What happens if you go over the concessional cap?

The excess is added to your assessable income and taxed at your marginal rate, with a 15% offset for tax the fund already paid. The excess concessional contributions charge that once applied on top was removed from 1 July 2021. You can elect to release up to 85% of the excess, and anything left in super counts towards your non-concessional cap.

Is salary sacrifice better than a personal deductible contribution?

Both are concessional and both share the same $32,500 cap. Salary sacrifice runs automatically through payroll. Personal deductible contributions need a valid notice of intent lodged with your fund and acknowledged by the fund before you lodge your return. If you're aged 67 to 74 when the contribution is made, you also need to meet the work test — gainful employment for at least 40 hours in any 30 consecutive days during that financial year — or qualify for the work test exemption, which is available once, in the year after you last met the work test, provided your total super balance was under $300,000 at the previous 30 June. The choice usually comes down to convenience and cash flow.

Can you still contribute after 67?

Yes. Since 1 July 2022, people under 75 can generally make voluntary contributions without meeting a work test, and that includes salary sacrifice through an employer. The work test only comes back into play if you're 67 to 74 and want to claim a tax deduction for a personal contribution. From 75, voluntary contributions generally stop, with limited exceptions such as downsizer contributions and compulsory employer SG.

Did the cap really change this year?

Yes. It rose from $30,000 to $32,500 on 1 July 2026. If you set your salary sacrifice amount before then, you have room you're probably not using.

The point of all this

Salary sacrifice is one tool among several for building super inside the concessional cap, and it's a good one for a lot of Australians on middle and upper incomes. But it's a number, not a decision you make once. The right amount depends on what you earn, what you owe, what your household needs each fortnight, and how far away retirement is.

The cap moved on 1 July. If your salary sacrifice hasn't been reviewed since before then, now is a reasonable time to look at it. Otivo's super advice modules can model the figures against your own situation.

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