Income Tax Brackets and Rates in Australia: How the Tax System Works (2025–26)

The following rates apply to Australian resident individuals for the 2025–26 financial year (1 July 2025 to 30 June 2026):

• $0 – $18,200: 0% (tax-free threshold). No tax payable on income up to $18,200.
• $18,201 – $45,000: 16 cents for each $1 over $18,200. Maximum tax in this bracket: $4,288.
• $45,001 – $135,000: $4,288 plus 30 cents for each $1 over $45,000. Maximum tax in this bracket: $27,000.
• $135,001 – $190,000: $31,288 plus 37 cents for each $1 over $135,000. Maximum tax in this bracket: $20,350.
• Over $190,000: $51,638 plus 45 cents for each $1 over $190,000.
• These rates reflect the Stage 3 tax cuts that took effect from 1 July 2024. The 19% bracket was reduced to 16%, the 32.5% rate reduced to 30%, and the 37% threshold moved from $120,000 to $135,000 - the largest restructuring of individual income tax in over a decade.

The progressive system means you pay different rates on different portions of income:

• Marginal rate vs effective (average) rate: Your marginal rate is the rate on your highest dollar of income. Your effective rate is total tax divided by total income - almost always lower than your marginal rate. A person earning $100,000 does not pay 30% on all $100,000; they pay 0% on the first $18,200, 16% on the next $26,800, and 30% on the remaining $55,000.
• Example - $100,000 income: Tax on first $18,200 = $0. Tax on $18,201–$45,000 = $4,288. Tax on $45,001–$100,000 = $16,500. Total income tax = $20,788. Effective rate = 20.8%. Marginal rate = 30%.
• Example - $150,000 income: Total income tax ≈ $36,838 (before offsets). Effective rate ≈ 24.6%. Marginal rate = 37%.
• Why this matters for decisions: The marginal rate is the right rate to use when evaluating the tax benefit of a deduction or the tax cost of additional income. A $10,000 salary sacrifice contribution by a 37% marginal rate earner saves $3,700 in income tax (taxed at 15% in super instead of 37%).

Most taxpayers pay an additional 2% Medicare levy on top of income tax:

• Medicare levy: 2% of taxable income for most Australian residents. Added to the income tax calculation. A $100,000 income incurs a $2,000 Medicare levy in addition to the $20,788 income tax - total $22,788.
• Medicare levy low-income threshold: For 2025–26, individuals with taxable income below approximately $26,000 pay a reduced or zero Medicare levy. Families and pensioners have separate, higher thresholds.
• Medicare Levy Surcharge (MLS): High-income earners without adequate private hospital cover pay an additional 1–1.5% surcharge. For singles earning above approximately $93,000 (2025–26 threshold) without private hospital cover, the MLS applies. The surcharge is specifically designed to incentivise private health cover uptake - the cost of a basic hospital policy is usually less than the MLS for those above the threshold.

Several offsets reduce the amount of tax payable (not taxable income - the actual tax bill):

• Low Income Tax Offset (LITO): For 2025–26, the maximum LITO is $700 for incomes up to $37,500, phasing out between $37,500 and $66,667. At lower incomes, this effectively raises the tax-free threshold above $18,200.
• Low and Middle Income Tax Offset (LMITO): Ended after 2021–22. No longer applies.
• Senior and Pensioners Tax Offset (SAPTO): For eligible seniors receiving the Age Pension or self-funded retirees who meet age and income tests. Can significantly reduce or eliminate tax liability for eligible retirees.
• Franking credits (dividend imputation): Australian dividends come with franking credits representing tax already paid by the company (at 30% or 25%). These credits offset your income tax liability - and if they exceed it, may be refunded as a cash payment.

Within the rules, several strategies meaningfully reduce income tax:

• Salary sacrifice into super: Pre-tax contributions to super are taxed at 15% in the fund rather than your marginal rate. At 30% marginal rate, each $1 of salary sacrifice saves 15 cents in tax. At 37%, it saves 22 cents. The concessional cap is $30,000/year including employer contributions.
• Claiming all legitimate deductions: Work-related expenses (home office, equipment, professional development, union fees), investment-related expenses (interest on investment loans, management fees), and income protection premiums all reduce taxable income. Claim everything you are entitled to - but only what you are genuinely entitled to.
• Investment structure: Holding income-producing assets in a spouse's name if they are on a lower marginal rate (where appropriate and legitimate), or via a discretionary trust that can distribute income to lower-rate beneficiaries, reduces the household tax burden.
• Timing deductions and income: Prepaying investment loan interest or deductible expenses before 30 June brings forward deductions. Deferring income (e.g., delaying invoicing) to a lower-income year defers the tax obligation.

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