Understanding Australian Tax Brackets for 2025–26

Taxes are a part of life, but understanding how they work can make managing your money simpler and help you keep more of your hard-earned income. Australia uses a progressive tax system, meaning different parts of your income are taxed at different rates. With the start of the 2025–26 financial year, it’s the perfect time to review the latest tax brackets and see what recent changes mean for you.

Whether you earn a salary, run a small business, or invest, being clear about your tax obligations helps you budget effectively and make smarter financial decisions. This guide covers everything you need to know about Australian tax brackets, recent changes, and how they impact your finances. You’ll also find useful insights for businesses and practical tips to better manage your tax bill.

How Tax Brackets Work (Progressive Tax System)

In Australia, income tax rates increase progressively as your assessable income grows. This system uses tax brackets, which are set ranges of income taxed at specified rates. A common misunderstanding is that once you earn enough to reach the next bracket, your entire income gets taxed at the higher rate. Fortunately, that isn’t how it works.

Here’s how it actually works: your income is split into different segments, each taxed at its own rate. For example, if you earn $60,000, only the portion of your income above the previous bracket threshold is taxed at the higher rate. The money you earn below each threshold remains taxed at lower rates.

There are two key terms you’ll encounter when dealing with tax brackets:

• Marginal Tax Rate: The rate at which your last dollar earned is taxed.
• Effective Tax Rate: The overall percentage of your income paid in taxes.

Knowing the difference between these helps you make better financial choices, like negotiating a pay rise or understanding the tax impact of bonuses and overtime.

Current Australian Income Tax Brackets (2024–25 and 2025–26)

Australia’s current tax brackets apply to income earned during the financial years 2024–25 and 2025–26. These brackets reflect the latest government adjustments following the Stage 3 tax cuts introduced in July 2024.

Australian Resident Tax Rates for 2024–25 and 2025–26:

(These amounts do not include the Medicare levy.)

The tax-free threshold means that if you earn less than $18,200 annually, you pay no income tax. Due to the Low Income Tax Offset (LITO), individuals earning slightly above this level effectively pay no tax on earnings up to around $22,000.

These current brackets mean that many Australians will pay less tax overall, especially in lower and middle-income ranges. If your income has changed, or you’re aiming to maximise your earnings, familiarising yourself with these brackets makes budgeting easier and helps you plan effectively for the coming year.

What is the Medicare Levy?

The Medicare Levy is an additional tax that helps fund Australia’s public healthcare system, Medicare. Most Australian taxpayers contribute to this levy, which is currently set at 2% of their taxable income.

Here’s how it works:

• Standard Rate: Most taxpayers pay 2% of their taxable income as the Medicare Levy, in addition to regular income tax.
• Exemptions and Reductions: If your income is below certain thresholds, you may pay a reduced rate or be entirely exempt from the levy. Low-income earners, seniors, pensioners, and certain government benefit recipients may qualify for these exemptions or reductions.
• Medicare Levy Surcharge (MLS): High-income earners who do not have adequate private health insurance may be required to pay an additional Medicare Levy Surcharge, ranging from 1% to 1.5%, based on income levels.

Medicare Levy Income Thresholds (2025–26)

These thresholds adjust annually, so checking with the Australian Taxation Office or consulting your accountant each year ensures accurate planning and compliance.

Example: Calculating Tax Using the Brackets

Let’s break down exactly how tax brackets work by using a practical example. Suppose you earn an annual salary of $70,000 during the 2025–26 financial year. Here’s how your tax would be calculated step-by-step:

• First $18,200: You pay no tax on this income.
• $18,201 to $45,000: This amount is $26,800. At 16%, that’s $4,288 in tax.
• $45,001 to $70,000: This amount is $25,000. At 30%, that’s $7,500 in tax.

Your total income tax payable would therefore be:

• $4,288 (bracket 2) + $7,500 (bracket 3) = $11,788 total tax

Your effective tax rate is your total tax divided by your total income. In this case:

• Effective tax rate: $11,788 ÷ $70,000 = approximately 16.84%

Knowing your effective tax rate helps you understand how much of your income actually goes to tax, providing clarity when you’re considering job offers, raises, or additional work.

Recent Changes to Tax Brackets (Stage 3 Tax Cuts)

One of the most significant recent developments in Australia’s tax system has been the Stage 3 tax cuts, implemented from 1 July 2024. These changes adjusted the tax rates and thresholds, meaning many Australians now pay less tax overall.

Here’s a quick overview of the main changes introduced in Stage 3:

• The tax rate for the bracket from $18,201 to $45,000 was reduced from 19% to 16%, benefiting lower-to-middle income earners.
• The 32.5% rate bracket was simplified and reduced to 30%, applying to incomes from $45,001 all the way to $135,000. Previously, this bracket ended at $120,000.
• The bracket for incomes between $135,001 and $190,000 was adjusted to a rate of 37%. The top tax bracket of 45% now begins at $190,001 (up from the previous $180,000).

These changes mean that approximately 95% of taxpayers have experienced some level of tax relief, especially middle-income earners. For instance, someone earning around $80,000 per year now pays around $1,000 less annually compared to previous rates.

These Stage 3 cuts aimed to simplify Australia’s tax system and provide relief to middle-income Australians, boosting disposable incomes and supporting broader economic growth.

Possible Future Updates to Tax Brackets

Tax brackets don’t remain static; they regularly shift based on government policy and economic conditions. The Australian government has already legislated additional gradual reductions in the coming financial years. For instance:

• The 16% tax bracket (currently for incomes between $18,201–$45,000) is set to be reduced further to 15% from 2026–27.
• This bracket is scheduled to decrease again to 14% starting from the 2027–28 financial year.

These adjustments will again slightly increase disposable income for taxpayers within those brackets, particularly benefiting lower to middle-income earners.

A topic regularly discussed, though not yet legislated, is the idea of indexing Australia’s tax brackets to inflation. Currently, brackets aren’t automatically adjusted for inflation, which can lead to bracket creep – a situation where rising wages push taxpayers into higher tax brackets over time, even if their purchasing power remains the same.

Future governments may consider regularly adjusting thresholds to inflation to maintain fairness in the tax system. Being aware of these potential changes helps you prepare for your financial future and ensure your tax planning remains effective.

Company and Small Business Tax Rates

While individuals pay tax according to progressive tax brackets, Australian companies pay tax differently. Businesses structured as companies pay a flat corporate tax rate on their profits, rather than using progressive brackets.

Here are the current corporate tax rates for the 2025–26 financial year:

The reduced 25% rate aims to support smaller companies by allowing them to reinvest more profits into growth and employment.

However, it’s essential to understand that sole traders and partnerships do not pay corporate rates. Instead, these structures pay taxes based on personal income tax brackets. If you operate your small business as a sole trader, any profits are considered part of your personal income and taxed accordingly.

Some small business owners choose to restructure their businesses as companies if their income grows significantly, making the flat corporate rate attractive. Before making such a decision, consult a tax professional to ensure the benefits outweigh potential complexities, like compliance costs or tax treatment on dividends.

Tax Planning Tips and Considerations

Understanding how Australian tax brackets work is only part of effective financial management. Smart tax planning allows you to reduce your overall tax liability legally. Consider these tips when managing your finances throughout the year:

• Don’t worry about moving to a higher bracket: If a raise or bonus pushes you into a higher bracket, you still earn more money overall. Only the additional income above the previous bracket threshold attracts the higher tax rate.
• Use year-end timing strategies: If your income places you near the threshold of a higher bracket, strategically timing deductible expenses can lower your taxable income and help keep you in a lower bracket. Common deductible expenses include charitable donations, work-related costs, and professional memberships.
• Maximise deductions and offsets: Ensure you claim all legitimate deductions and offsets. Work-related expenses, education costs related to your job, and the Low Income Tax Offset (LITO) can significantly reduce your tax bill. Keeping accurate records helps ensure you don’t miss potential savings.
• Consider salary sacrificing into super: Salary sacrificing into your superannuation fund reduces your taxable income, potentially lowering your marginal tax rate. Contributions to super are taxed at just 15%, typically much lower than personal income tax rates.
• Seek professional advice: If considering major financial changes, such as transitioning from sole trader to company structure, professional tax advice can clarify potential advantages and pitfalls. An accountant or tax adviser ensures you make informed decisions to optimise your tax outcomes.

Smart tax planning means paying what you owe without paying more than necessary, freeing up money to save, invest, or spend as you prefer.

Key Takeaways

Here’s a quick summary of essential points to remember from this guide:

• Australia has a progressive tax system: higher rates apply only to income segments above specific thresholds.
• Current tax brackets for 2025–26:
  • $0–$18,200: 0% (tax-free threshold)
  • $18,201–$45,000: 16%
  • $45,001–$135,000: 30%
  • $135,001–$190,000: 37%
  • Above $190,000: 45%
• Recent Stage 3 tax cuts have simplified brackets and reduced rates, benefiting most taxpayers.
• More small reductions in lower brackets are scheduled (15% in 2026–27, 14% from 2027–28).
• Businesses structured as companies pay flat corporate tax rates (25% for smaller entities, 30% for larger ones). Sole traders pay individual rates.
• Strategic timing of deductions and maximising offsets can reduce your taxable income effectively.
• Salary sacrificing into superannuation provides a tax-efficient way to save for retirement and reduce current tax liabilities.

Being informed about these details ensures you maximise your income and avoid unnecessary tax payments.

Frequently Asked Questions (FAQs)

How Do I Figure Out Which Tax Bracket I’m In?

Your tax bracket is based on your total taxable income for the financial year. You can find this by adding up your income from all sources (like wages, interest, and investments) and subtracting any deductions. Once you have your taxable income, compare it with the Australian tax brackets outlined earlier. Your highest tax bracket is the rate applied to your last dollar earned, which is known as your marginal tax rate. Remember, your income typically spans multiple brackets.

If a Pay Rise Puts Me in a Higher Tax Bracket, Will I Take Home Less Money?

No, moving into a higher bracket does not mean you’ll take home less money. Only the amount you earn above the threshold of the new bracket is taxed at the higher rate. All income below that threshold is taxed at lower rates. A pay rise always increases your overall take-home pay, despite higher marginal tax rates.

Example:

• If your salary increases from $44,000 to $47,000, only the $2,000 above the $45,000 threshold is taxed at 30%. The first $45,000 is still taxed at the lower rate of 16%.

What Is the Tax-Free Threshold and Who Gets It?

The tax-free threshold is currently $18,200. This means if your taxable income is below this amount, you pay no income tax. Australian residents for tax purposes automatically receive this benefit. With the Low Income Tax Offset (LITO), the effective tax-free income threshold is even higher, around $22,000, benefiting lower-income earners. Non-residents do not qualify for this threshold.

Do Non-Residents or Backpackers Pay the Same Tax Rates?

No, non-residents and working holiday makers (backpackers) have different tax rates:

• Non-residents typically pay a flat rate of 32.5% on all Australian-sourced income up to $120,000, with higher rates applying beyond that. They don’t benefit from the tax-free threshold.
• Working holiday makers (backpackers on special visas) pay a rate of 15% up to the first $45,000 earned, with higher rates applying beyond that.

These specific rates acknowledge that non-residents and backpackers don’t have the same access to public services as residents.

How Are Small Business or Company Taxes Different From Personal Tax?

Businesses structured as companies pay tax at a flat corporate rate: 25% for small to medium-sized enterprises (turnover below $50 million with mainly active business income) and 30% for large companies. Sole traders and partnerships don’t pay corporate rates. Their business profits are taxed under individual personal tax brackets.

If you operate as a sole trader and your profit increases significantly, restructuring to a company could offer tax advantages. However, company profits eventually distributed as dividends to shareholders are taxed again at the individual’s marginal rates, offset by franking credits.

When Do Tax Brackets Usually Change?

Tax brackets change when the Australian government introduces new legislation or adjusts existing rates. Recent examples include the Stage 3 tax cuts implemented on 1 July 2024, with further reductions already legislated for future years. Australia’s tax brackets are not automatically adjusted for inflation, potentially causing bracket creep, where taxpayers gradually move into higher brackets over time due to wage growth. Governments regularly debate adjustments, but changes occur through legislation.

How Can I Reduce My Taxable Income Legally?

Several legitimate methods can lower your taxable income:

• Claim all eligible work-related deductions, like expenses for uniforms, home office, professional development, or industry memberships.
• Salary sacrifice into your superannuation, as contributions are taxed at a lower rate (typically 15%).
• Donate to registered charities or non-profits to claim deductible donations.
• Consider investing in tax-effective structures or products, but always seek professional advice to ensure compliance.

Following these guidelines can significantly decrease your annual tax burden legally and ethically.

If you need personalised advice or have specific questions about your circumstances, KNS Accountants and Business Advisors are here to help.