Understanding how much income tax you really pay can feel like deciphering a foreign language. Most of us glance at the brackets, see a headline percentage, and assume every dollar will be hit at that highest rate. The truth is far kinder, and once you see the numbers in action the system becomes, if not simple, at least predictable. This guide translates the official rules into plain English, walks through worked examples for common incomes, and flags the changes already locked in for July 2026 and beyond. Everything here draws on the latest Australian Taxation Office figures, current as at 4 December 2025.
How Australia’s Personal Income Tax System Works in Practice
Australia uses a progressive, marginal tax system. You pay nothing on the first slice of taxable income up to the tax-free threshold, then progressively higher percentages on each additional slice. Only the part of your income that falls inside a bracket is taxed at that bracket’s rate. As a result your effective, or average, tax rate is always lower than your top marginal rate.
The tax year, also called the income year, runs from 1 July to 30 June. When you complete your return after 30 June you state your total taxable income, subtract any deductions, apply the correct brackets, then add the Medicare levy and subtract any offsets. Employers withhold instalments through pay-as-you-go (PAYG), but the annual return finalises the exact amount.
Current Resident Tax Scales for 2024-25 and 2025-26
These are the resident brackets most Australians are using right now and next year. The figures exclude the 2 per cent Medicare levy, which is calculated afterwards.
| Taxable income (2024-26) | Tax on this income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 16 c for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30 c for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37 c for each $1 over $135,000 |
| $190,001 and above | $51,638 plus 45 c for each $1 over $190,000 |
These rates took effect on 1 July 2024, following the Stage 3 tax changes legislated back in 2019 and tweaked in the 2024 Budget. The Government confirmed in May 2025 that the same scales will apply for the 2025-26 year, so you already know where you stand for two full years.
Non-residents and working holiday makers face different scales with no tax-free threshold. However, the vast majority of people living and working permanently in Australia meet the residency tests and use the table above.
Debunking the “Higher Bracket Horror” Myth
Many workers fear a pay rise that nudges them into the next bracket will leave them worse off. That can never happen because the higher percentage applies only to the dollars above the threshold. If your salary rises from $135,000 to $135,001, only that single extra dollar is taxed at 37 per cent. Your net pay still increases because the first $135,000 remains taxed exactly as before.
A second misconception is that your top marginal rate shows how much tax you pay on average. It does not. Someone earning $90,000 sits inside three brackets, but their effective rate after applying all slices is much lower than 30 per cent. The worked examples below spell this out.
Step-by-Step Calculation Examples
Worked examples highlight how the brackets translate into real tax bills. Each example omits offsets for clarity, then shows the Medicare levy added at the end.
Example 1: Taxable Income $30,000
First $18,200 taxed at 0 per cent
Next $11,800 taxed at 16 per cent = $1,888
Total income tax = $1,888
Medicare levy = 2 per cent of $30,000 = $600
Total tax and Medicare = $2,488
Effective tax rate = 8.29 per cent
Example 2: Taxable Income $60,000
First $18,200 at 0 per cent = $0
Next $26,800 ($18,201–$45,000) at 16 per cent = $4,288
Remaining $15,000 ($45,001–$60,000) at 30 per cent = $4,500
Total income tax = $8,788
Medicare levy = 2 per cent of $60,000 = $1,200
Total tax and Medicare = $9,988
Effective tax rate = 16.65 per cent
Example 3: Taxable Income $90,000
First $18,200 at 0 per cent = $0
Next $26,800 at 16 per cent = $4,288
Next $45,000 ($45,001–$90,000) at 30 per cent = $13,500
Total income tax = $17,788
Medicare levy = 2 per cent of $90,000 = $1,800
Total tax and Medicare = $19,588
Effective tax rate = 21.76 per cent
Example 4: Taxable Income $150,000
First $18,200 at 0 per cent = $0
Next $26,800 at 16 per cent = $4,288
Next $90,000 ($45,001–$135,000) at 30 per cent = $27,000
Remaining $15,000 ($135,001–$150,000) at 37 per cent = $5,550
Total income tax = $36,838
Medicare levy = 2 per cent of $150,000 = $3,000
Total tax and Medicare = $39,838
Effective tax rate = 26.56 per cent
Example 5: Taxable Income $220,000
First $18,200 at 0 per cent = $0
Next $26,800 at 16 per cent = $4,288
Next $90,000 at 30 per cent = $27,000
Next $55,000 ($135,001–$190,000) at 37 per cent = $20,350
Remaining $30,000 ($190,001–$220,000) at 45 per cent = $13,500
Total income tax = $65,138
Medicare levy = 2 per cent of $220,000 = $4,400
Total tax and Medicare = $69,538
Effective tax rate = 31.61 per cent
These snapshots confirm that even a high-income earner on $150,000 keeps roughly 73 cents of every additional dollar earned because only the top slice attracts 37 per cent plus Medicare.
How Tax Offsets Can Push Your Effective Rate Even Lower
Offsets reduce the tax you owe after the brackets have done their work. The two most common are the Low Income Tax Offset (LITO) and, until 30 June 2024, the Low and Middle Income Tax Offset (LMITO). LMITO ended with the 2023-24 year, but LITO remains. In 2025-26 it can cut up to $700 from the tax for incomes up to $37,500 and then tapers out at $66,667.
For senior Australians who qualify for the Seniors and Pensioners Tax Offset, the first $32,615 of taxable income can be effectively tax-free. Because offsets apply after Medicare, they do not affect the levy unless an offset specifically targets it.
Adding the Medicare Levy and Surcharge
The Medicare levy funds the public health system and sits at 2 per cent of taxable income for most Australians. Low-income thresholds exempt singles earning up to $26,000 and families up to $41,089 plus $3,760 for each dependent child. If you earn above $93,000 as a single or $186,000 as a family and do not hold suitable private hospital cover, an extra Medicare Levy Surcharge of between 1 and 1.5 per cent may apply.
Because the levy is a flat percentage, it pushes the effective tax rate up by the same two percentage points regardless of bracket. A $60,000 earner in the earlier example rose from an income tax effective rate of 14.65 per cent to a combined rate of 16.65 per cent once the levy appeared.
Locked-In Changes from 1 July 2026
Although Canberra has signalled no fresh amendments since the 2024 Budget, legislation already on the books schedules further cuts to the lower brackets from the 2026-27 year. Unless a future Parliament reverses them, the 16 per cent bracket will fall to 15 per cent and the 30 per cent bracket to 29 per cent on 1 July 2026, then 14 per cent and 28 per cent a year later.
To illustrate the savings, the next table compares tax on three example incomes today versus 2026-27. Medicare is excluded so you can see the bracket effect in isolation.
| Taxable income | 2025-26 tax | 2026-27 tax (projected) | Difference |
|---|---|---|---|
| $35,000 | $2,688 | $2,348 | –$340 |
| $80,000 | $14,688 | $13,888 | –$800 |
| $140,000 | $38,438 | $36,938 | –$1,500 |
Assuming no other variables change, a worker on $80,000 should keep an extra $800 in their pocket each year from July 2026 simply because the slice above $18,200 will be taxed at 15 per cent instead of 16 per cent, and the slice between $45,001 and $80,000 will fall from 30 per cent to 29 per cent.
Non-Residents, Working Holiday Makers and Seniors: Key Differences
Non-resident individuals pay 32.5 per cent from the first dollar up to $135,000, 37 per cent from $135,001 to $190,000 and 45 per cent beyond. They do not receive the $18,200 tax-free threshold or LITO, but they also do not pay the Medicare levy because they generally cannot access Medicare benefits. Working holiday makers face a special 15 per cent rate on the first $45,000, then step into the non-resident scales.
Senior Australians who satisfy age and residency criteria benefit from higher effective tax-free thresholds through the Seniors and Pensioners Tax Offset. For a single senior, no income tax is payable on taxable income up to $32,615 in 2025-26, although the Medicare levy may still apply.
Penalties for Getting It Wrong
Failure to lodge your annual return on time triggers a penalty of one penalty unit (currently $222) for every 28-day period or part thereof, up to a maximum of five units. If the ATO discovers an understatement of income, administrative penalties range from 25 per cent to 75 per cent of the shortfall plus interest. Deliberate evasion can attract criminal prosecution, fines into the hundreds of thousands and potential jail.
Maintaining accurate records for at least five years, reconciling PAYG summaries, and lodging by 31 October (or later if using a registered tax agent) remains the simplest defence against stress and fines.
Frequently Asked Questions
Does earning more push all of my income into a higher bracket?
No. Only the part of your income above each threshold is taxed at the higher rate, so a pay rise always leaves you better off after tax.
Why did my take-home pay fall after a pay rise earlier in the year?
That usually happens because your employer’s payroll software recalculated PAYG withholding based on year-to-date income. You still earn more over the full year, but fortnightly or monthly amounts can dip briefly when a new bracket’s withholding kicks in.
How do I work out my effective tax rate quickly?
Divide the total tax payable (including Medicare) by your taxable income. If your taxable income is $90,000 and your total tax plus levy is $19,588, your effective rate is 21.76 per cent.
When will the next changes happen?
Current law schedules further rate cuts on 1 July 2026 and 1 July 2027. Parliament would need to pass new legislation to alter or delay them.
Key Takeaways and Next Steps
Australian personal income tax looks intimidating in table form, yet the logic behind it is straightforward. Calculate taxable income, apply the marginal brackets slice by slice, add the Medicare levy, then claim any offsets to bring the final figure down. The worked examples prove the system rewards extra income rather than punishing it, while the comparison table shows the concrete savings heading your way in 2026-27.
If you want a precise forecast for your own pay packet, grab last year’s notice of assessment, update your expected income, and run the same steps. For complex situations, such as investment losses, foreign income, or large superannuation contributions, consider speaking with a registered tax agent. For expert guidance tailored to your unique financial profile, reach out to the team at EEA Advisory. Otherwise, armed with the tables and explanations above, you can approach the next tax season with clarity and confidence.
