How Australian Tax Brackets Work
Understand marginal vs effective tax rates, how the Australian bracket system actually works, and what you really pay at each income level.
General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.
Step 1.The Difference Between Marginal and Effective Tax
The biggest misconception about Australian tax is that moving into a higher bracket means all of your income is taxed at the higher rate. It does not. Australia uses a progressive marginal system, which means each slice of your income is taxed at the rate for that slice only. Your marginal rate is the rate you pay on your next dollar earned. Your effective rate is your total tax divided by your total income — always lower than your marginal rate. For example, someone earning $100,000 has a marginal rate of 30% but an effective rate closer to 22%. Understanding this distinction matters because fear of 'jumping a bracket' causes many Australians to turn down pay rises or extra shifts that would still leave them better off.
Step 2.The FY2025-26 Australian Resident Tax Brackets
For the 2025-26 financial year, the ATO's resident tax brackets are: $0-$18,200 taxed at 0% (the tax-free threshold), $18,201-$45,000 taxed at 16%, $45,001-$135,000 taxed at 30%, $135,001-$190,000 taxed at 37%, and above $190,000 taxed at 45%. These rates apply to taxable income, which is your gross income minus allowable deductions. Non-residents are taxed differently, with no tax-free threshold and a flat 30% on the first $135,000. Working holiday makers have their own schedule. The Stage 3 tax cuts that took effect on 1 July 2024 were adjusted from the original Coalition plan, resulting in the current four-bracket structure that benefits lower and middle income earners more than the original proposal.
Step 3.How to Calculate Your Tax Bill Bracket by Bracket
To work out your tax, apply each bracket rate to the portion of income that falls inside it, then add them together. Consider someone earning $85,000. The first $18,200 is tax-free. The next $26,800 ($18,201-$45,000) is taxed at 16%, giving $4,288. The remaining $40,000 ($45,001-$85,000) is taxed at 30%, giving $12,000. Total tax before offsets is $16,288. That gives an effective rate of about 19.2%, not the 30% marginal rate that applies to their top slice. Savings Mate's tax calculator handles this automatically and also factors in the Medicare Levy, HECS repayments, and the Low Income Tax Offset where applicable, so you can see your genuine take-home pay in seconds.
Step 4.The Medicare Levy and Medicare Levy Surcharge
On top of income tax, most Australians pay a 2% Medicare Levy on their taxable income to fund public healthcare. Low income earners get a reduction or exemption — for singles, the levy phases in between $27,222 and $34,027 for 2025-26. If you earn over $101,000 as a single or $202,000 as a family and do not have eligible private hospital cover, you also pay the Medicare Levy Surcharge (MLS) of 1% to 1.5% on top. For many higher earners, a basic private hospital policy costs less than the MLS it would save, so the maths often favours getting cover. Check the ATO's MLS thresholds each financial year because they change with indexation.
Step 5.Tax Offsets, Deductions and What Actually Reduces Your Tax
Deductions and offsets work differently. A deduction reduces your taxable income before tax is calculated — so a $1,000 deduction saves you $1,000 times your marginal rate (e.g. $300 at the 30% bracket). An offset reduces the tax payable after it is calculated, dollar for dollar. The Low Income Tax Offset (LITO) gives up to $700 for incomes under $37,500 and phases out by $66,667. The Seniors and Pensioners Tax Offset (SAPTO) applies to eligible retirees. Common deductions include work-related expenses, self-education costs directly linked to your current job, home office expenses, and donations to deductible gift recipients. Always keep receipts for five years — the ATO can and does audit.
Step 6.Common Tax Bracket Myths to Ignore
Three myths cause the most confusion. First, 'a pay rise will push me into a higher bracket and I will lose money' — this is never true under a marginal system, you always keep more money after a pay rise. Second, 'salary sacrificing saves me 47% tax' — it only saves the difference between your marginal rate and the 15% contributions tax inside super, so 32% for a top bracket earner, not 47%. Third, 'deductions give me a refund for the full amount I spent' — they only refund your marginal rate, so a $500 deduction at the 30% bracket gives you $150 back, not $500. Understanding the maths stops you from making expensive assumptions.
Useful Tools
- Tax Calculator — see your exact tax bill for FY2025-26
- Take-Home Pay Calculator — after tax, Medicare levy and HECS
- HECS Calculator — how your HECS debt affects your pay
Resources
- ATO — Individual income tax rates
- ATO — Medicare levy and MLS thresholds
- ASIC MoneySmart — Income tax explained