Deferred salary (4 over 5) calculator

How to use the deferred salary (4 over 5) calculator

How a deferred salary scheme works

You agree to be paid a fixed fraction of your salary for the whole scheme. On 4 over 5 that's 80%: you work four years, the other 20% is held back each year, and it funds your fifth year off. Your pay doesn't stop in the leave year. You get the same reduced fortnightly pay all the way through, so there's no gap to budget for.

Schemes come in two designs, and they're taxed differently (the ATO's position is in Taxation Determination TD 93/242). In a salary-reduction scheme, used in WA's public-sector framework and Tasmania's self-funded leave scheme, your salary is cut to 80% (or the plan percentage) and you're taxed only on what you're paid. In an after-tax set-aside scheme, used by the NSW and Queensland education departments, you're paid and taxed on your full salary while you work, 20% of your net pay is held back, and that already-taxed money is paid to you in the leave year.

The ACT has no 4-over-5 for teachers (you can buy a term or a semester instead), the NT offers 1 to 8 weeks of purchased leave, and we found no published teacher scheme in Victoria's VGSA 2022 (we haven't yet checked the new VGSA 2026) or confirmed one in SA. Schemes are usually for permanent staff, need approval, and have set lengths, so check your employer's policy first.

Why the salary-reduction design saves tax

Tax is progressive. Spread the same income over five tax years instead of four and less of it falls in the 30% bracket. You also get the tax-free threshold and low tax rates five times instead of four, which you'd waste in a year of unpaid leave with no income. In the WA example that's about $9,480 over the scheme. The NSW and Queensland design doesn't do this, because your full salary is taxed each year and the set-aside is your own after-tax money.

The catch is the comparison with not taking the year off at all. In the WA example, working all five years at full pay would put about $481,706 in your pocket against $394,845 on the scheme, so the paid year off costs roughly $86,900 in take-home pay. The calculator shows both numbers so you can see the price of the break, not just the tax saving.

Service, leave and what happens if you pull out

• Service: in many schemes the leave year counts as service for pay steps and long service leave, unlike most leave without pay. Confirm this in writing for your state.
• Leaving early: if the scheme is cancelled, you're normally paid back the deferred salary as a lump sum. It's taxed in the year you receive it, which can wipe out much of the tax saving.
• HECS-HELP: in a salary-reduction scheme, repayments are based on the reduced salary, so they fall each year. In the NSW and Queensland design they're based on your full salary. Tick the HELP box to include it.
• Borrowing: a lender is likely to look at the reduced salary on your payslips, which may matter if you're planning to buy or refinance during the scheme.

Deferred salary or another kind of break?

A deferred salary scheme suits a planned year off: travel, study, family. If you need a break sooner, half-pay long service leave stretches what you've already earned, and part-time work or a job share cuts your load without a full year away. Our guide to the teacher deferred salary scheme goes through each state's rules, and the part-time teacher pay calculator shows what a smaller fraction would pay. If you're in a state defined-benefit fund, read teacher defined benefit super schemes first.