By Paul Feeney, Founder and Chief Executive Officer, Otivo

Salary sacrifice is an arrangement where part of your before-tax pay is redirected into your super fund instead of paid as wages. It can reduce taxable income while adding to retirement savings. As at May 2026, salary sacrifice contributions count towards the $30,000 annual concessional contributions cap set by the ATO.

Salary sacrifice is one of the most common strategies Australians use to grow their super while they're still working. The idea is straightforward: redirect a portion of pre-tax salary into super rather than receiving it as take-home pay. This article walks through how the arrangement works, the main benefits people consider, the contribution caps that apply, and what's worth thinking about before setting one up.

How does salary sacrifice for super work in Australia

Salary sacrifice is a formal agreement between an employee and an employer to redirect part of pre-tax salary into super. Instead of the money landing in a pay packet, the employer pays it directly into the super fund. The result is a lower gross taxable income and a larger contribution to retirement savings.

Salary sacrifice contributions are taxed at 15% inside super (up to the concessional cap), rather than at the marginal income tax rates that can reach 45% plus the Medicare levy. For many earners, that gap is the main reason salary sacrifice is considered.

According to the Australian Taxation Office (ATO), a salary sacrifice arrangement should be agreed in writing before the work that earns the salary is performed. Anything contributed under the arrangement counts towards the concessional contributions cap.

What are the benefits of salary sacrificing into super

There are three main benefits of salary sacrificing into super that many Australians weigh up: lower tax on contributed income, compounding growth in a low-tax environment, and a faster path to retirement savings goals.

Lower tax on contributed income

Salary sacrifice contributions are generally taxed at 15% inside the super fund. For someone in a higher marginal tax bracket, that can mean a meaningful tax saving on the amount sacrificed compared with receiving it as wages. People earning over $250,000 (including reportable super contributions) may also pay an additional 15% Division 293 tax on their concessional contributions, so it can be worth understanding the full picture before deciding on an amount.

Compounding growth in a concessionally taxed environment

Earnings inside super are taxed at a maximum of 15%, which is lower than most marginal income tax rates. Over a working life, the gap between super tax and marginal tax can compound into a meaningfully larger balance at retirement. The longer the time horizon, the larger the potential effect.

A faster path to retirement savings goals

According to the Association of Superannuation Funds of Australia (ASFA) Retirement Standard, most Australians need roughly $595,000 (single) or $690,000 (couple) for a comfortable retirement. Salary sacrifice is one of the levers many Australians use to close the gap between a current super balance and a comfortable retirement target.

How much can you salary sacrifice into super each year

As at May 2026, the concessional contributions cap is $30,000 per year. This cap applies to all before-tax contributions combined, including:

• Employer Super Guarantee (SG) contributions, currently 12% of ordinary time earnings
• Salary sacrifice contributions
• Personal contributions claimed as a tax deduction

So someone earning $100,000 with employer SG contributions of around $12,000 has roughly $18,000 of headroom in the concessional cap before hitting the limit through salary sacrifice. The arithmetic shifts each financial year as income or the cap changes.

Carry-forward concessional contributions

If a total super balance was under $500,000 on 30 June of the previous financial year, unused concessional cap from up to five previous years can be carried forward and used in the current year. This rule has been available from 1 July 2018 onwards. Contribution history can be checked through ATO online services via myGov.

Who can salary sacrifice into super

Most employees in Australia can set up a salary sacrifice arrangement, although it depends on the employer agreeing to offer one. Some workplace agreements or contracts may restrict the arrangement or set out specific rules. People who are self-employed don't typically use salary sacrifice and may instead consider personal contributions claimed as a tax deduction.

How do you set up a salary sacrifice arrangement

Setting up salary sacrifice generally follows four steps:

1. Speak to the employer or payroll team. Confirm whether the employer offers salary sacrifice and ask about any internal forms or notice periods.
2. Decide on a contribution amount. A common consideration is current employer contributions, the concessional cap, and household budget needs.
3. Document the arrangement in writing. The ATO recommends agreements be written down before the relevant work is performed.
4. Review periodically. Income changes, new contribution caps, or shifts in budget can mean an existing arrangement needs updating.

What's worth considering before salary sacrificing

A few common considerations come up for people deciding whether and how much to salary sacrifice:

• Concessional cap headroom — exceeding the cap can trigger excess contributions tax.
• Cash flow — sacrificed income isn't accessible until preservation age, so household expenses still need to be covered.
• Preservation age and condition of release rules — these determine when super can be drawn on.
• Other contribution strategies — non-concessional contributions, personal deductible contributions, or government co-contributions may also be relevant depending on circumstances.

Otivo's salary sacrifice contributions module helps people work through these factors. It considers employer contributions, contribution limits, age, income, retirement age, household expenses, and projected investment values to surface whether salary sacrifice could make sense for the situation. Otivo holds AFSL and Australian Credit Licence No. 485665.

Frequently asked questions

Does salary sacrifice reduce your take-home pay

Yes. Salary sacrifice reduces gross income, which lowers take-home pay. The trade-off is more money in super and potentially less income tax paid overall. Many Australians model the impact in a calculator before settling on an amount.

Can you stop or change salary sacrifice at any time

Salary sacrifice arrangements can usually be changed or stopped, although this depends on the employer's policies and the terms of the written agreement. Reviewing the arrangement annually is something many people find useful, particularly when income changes or the concessional cap is updated.

What happens if you exceed the concessional contributions cap

Excess concessional contributions are added to assessable income and taxed at marginal rates, with a 15% tax offset to recognise the tax already paid by the super fund. The ATO notifies individuals through myGov if the cap has been exceeded, and there are options to release the excess from super to help cover the additional tax.

Does salary sacrifice affect employer Super Guarantee contributions

Since 1 January 2020, salary sacrificed amounts cannot reduce the ordinary time earnings base used to calculate employer Super Guarantee contributions. This means salary sacrifice doesn't reduce mandatory employer SG contributions, which sit at 12% as at May 2026.

Bringing it together

Salary sacrifice is one of the most flexible levers available in Australian super, but the right amount depends on individual income, age, household needs, and retirement goals. Otivo's retirement planning module and salary sacrifice contributions module can help model the impact and surface what an arrangement could mean for the bigger picture.

Disclaimer

The information in this communication is current as at May 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.