Understanding Australian Tax Brackets

How Australia taxes income

Australia uses a progressive tax system. Income is divided into bands, and each band is taxed at a set rate. The key principle is that each rate applies only to the portion of your income within that band, never to your entire income.

This means a pay rise can never leave you worse off after tax. If higher earnings push some income into a higher bracket, only the amount above the threshold is taxed at the higher rate. Everything below it is unaffected.

The tax brackets for FY2026–27

The following rates apply to Australian residents for the 2026–27 financial year. The 15% rate on the $18,201–$45,000 band is a further reduction from 16% in FY2025–26, announced in the 2025–26 Federal Budget:

On top of income tax, most residents pay a 2% Medicare Levy. The two are calculated separately but usually quoted together as a combined effective rate. High earners without private hospital cover may also pay the Medicare Levy Surcharge on top of this.

A worked example at $70,000

On a taxable income of $70,000, income tax is calculated band by band:

• First $18,200 at 0% = $0
• Next $26,800 (from $18,201 to $45,000) at 15% = $4,020
• Remaining $25,000 (from $45,001 to $70,000) at 30% = $7,500

Total income tax: $11,520. Adding the 2% Medicare Levy ($1,400) gives a combined bill of $12,920. On $70,000 income that is an effective rate of about 18.5%, even though the marginal rate (the rate on the top dollar) is 30%.

The tax-free threshold

Australian residents can earn up to $18,200 per year before paying any income tax. You claim this by ticking the relevant box on your tax file number declaration when starting a new job. You should only claim it from one employer at a time.

Foreign residents do not receive the tax-free threshold. They pay 30% from the first dollar of Australian-sourced income under the standard non-resident rates.

The Low Income Tax Offset (LITO)

LITO reduces the amount of tax owed by lower-income earners. It is applied automatically by the ATO when you lodge your tax return, as a direct reduction in tax payable, not as a reduction in taxable income.

• Up to $37,500: full offset of $700
• $37,501 to $45,000: reduces by 5 cents per dollar (from $700 down to $325)
• $45,001 to $66,667: reduces by 1.5 cents per dollar (from $325 down to $0)
• Above $66,667: no offset applies

LITO cannot reduce your tax below zero. Combined with the tax-free threshold, it effectively lifts the income level at which Australian residents start paying meaningful income tax to around $22,867 in FY2026–27.

Marginal rate vs effective rate

Your marginal tax rate is the rate applied to the next dollar you earn. Your effective tax rate is total tax paid divided by total income, and it is almost always lower than the marginal rate.

The worked example above shows this clearly. On $70,000, the marginal rate is 30%, but the effective rate including Medicare Levy is about 18.5%. The lower rates on the first portions of income drag the average down significantly.

When someone says they are "in the 30% bracket," they mean their top dollar is taxed at 30%, not that they pay 30% on everything they earn. Understanding this distinction prevents the common misconception that a pay rise can tip you into a bracket and leave you worse off.

What the Stage 3 tax cuts changed

The Stage 3 tax cuts took effect from 1 July 2024. The key changes were:

• The rate on the $18,201 to $45,000 band dropped from 19% to 16% (from 1 July 2024)
• The rate on the $45,001–$135,000 band dropped from 32.5% to 30%
• The upper boundary of the 30% bracket rose from $120,000 to $135,000
• The 37%/45% boundary rose from $180,000 to $190,000

From 1 July 2026 (FY2026–27), the $18,201–$45,000 band was reduced further from 16% to 15%, as announced in the 2025–26 Federal Budget. This is the rate that applies now.

Pay rises and bracket anxiety

One of the most persistent financial misconceptions in Australia is that a pay rise can leave you worse off because it "pushes you into a higher tax bracket." This cannot happen.

Consider an employee earning $134,000 who receives a $2,000 raise to $136,000. Only the $1,000 above the $135,000 threshold crosses into the 37% band, the other $1,000 is still in the 30% band. The tax on the raise is $300 (30%) + $370 (37%) = $670. Take-home increases by $1,330 compared to before the raise. The employee is unambiguously better off.

This is true at every bracket boundary. There is no dollar amount of additional income that reduces your take-home pay in Australia's progressive system.

Overtime, bonuses, and large one-off payments

Overtime pay is ordinary income and is taxed in exactly the same way as regular wages, at your marginal rate on the additional amount, with lower rates still applying to the income below each threshold.

The confusion often arises from how employers withhold tax. Payroll systems typically estimate your annual income by annualising each pay period. If you receive a large overtime payment or an annual bonus in a single pay, the software may estimate your full-year income as substantially higher than it actually is, and withhold tax at a correspondingly higher rate for that fortnight.

At tax return time, this is corrected. The ATO calculates what you actually owed based on your real annual income, compares it to what was withheld across the year, and issues a refund for any excess. Many Australians receive their largest tax refunds in years where they earned significant overtime or a bonus, not because tax was unfair, but because withholding over-estimated what they would owe.

Second jobs:income from a second employer is also ordinary income, but your employer cannot apply the tax-free threshold (you can only claim it from one employer at a time). Tax withheld from a second job is therefore typically at a higher rate (at least the 30% band rate), which is often experienced as "losing nearly half." At tax return time, if your combined income falls below the top brackets, any excess withholding is refunded.

PAYG withholding and tax returns

Employers withhold income tax from each pay under the Pay As You Go (PAYG) system. The amount withheld is based on the ATO's published tax withheld tables, which estimate tax on an annualised basis for each pay cycle. Employees do not choose their withholding rate, it is calculated automatically from their tax file number declaration (including whether the tax-free threshold is claimed).

At the end of each financial year (30 June), you lodge a tax return. The ATO calculates your actual tax liability based on all income and deductions, compares it to what was withheld, and either issues a refund (over-withheld) or raises an assessment (under-withheld).

Most Australian employees receive a refund, because PAYG withholding tables are calibrated slightly conservatively. Employees with significant deductions, multiple jobs processed separately, or one-off high-income events generally receive larger refunds.

Reducing your taxable income

There are legitimate strategies to reduce the amount of income on which tax is calculated:

• Salary sacrifice into super: pre-tax contributions are taxed at 15% inside super rather than at your marginal rate. On a 30% marginal rate, the saving is 15 cents per dollar contributed. See the salary sacrifice guide for the full mechanics.
• Genuine work-related deductions: the ATO allows deductions for expenses directly incurred in earning income, including certain tools, uniforms, home office expenses, and professional development. These must be supported by records and not reimbursed by your employer.
• Investment property losses (negative gearing): if your deductible rental expenses exceed your rental income, the net loss can be deducted against your other income, reducing taxable income in that year.

Deductions reduce taxable income, not the tax rate. A $1,000 deduction at a 30% marginal rate saves $300 in tax, not $1,000.

Common misconceptions

"A pay rise or overtime could leave me worse off after tax"

This cannot happen. Higher rates apply only to the income above the bracket boundary. Everything below is always taxed at the same rate regardless of what you earn above it. The marginal system guarantees every extra dollar earned results in more take-home pay.

"The top tax rate is 45%"

The top income tax rate is 45%, but the 2% Medicare Levy brings the combined top marginal rate to 47% for most high earners. Those who earn above the Medicare Levy Surcharge threshold ($105,000 for singles in FY2026–27) and do not hold private hospital cover also face an additional surcharge of 1–1.5%.

"I should avoid going over a bracket threshold"

There is no threshold worth avoiding. Higher rates apply only to the portion of income above the boundary. Earning $135,001 does not mean your entire income is suddenly taxed at 37%, only that one extra dollar enters the 37% band.

"I have to pay tax on my full salary"

Tax is calculated on taxable income, not gross salary. Work-related deductions, salary sacrifice contributions, and other allowable deductions all reduce taxable income before the brackets are applied. The tax-free threshold ($18,200) and LITO further reduce the effective amount owed.

Frequently asked questions

Official sources

• Australian Taxation Office - current resident tax rates, Medicare levy, and LITO

Looking for just the current figures? See the Income Tax quick-reference sheet.