How the progressive tax system works
Australia uses a progressive income tax system. This means your income is divided into slices (brackets), and each slice is taxed at a different rate. Only the income within each bracket is taxed at that bracket's rate — not your entire income.
This is one of the most common misunderstandings in Australian tax. If you earn $50,000, you do not pay 30% on the whole amount. You pay 0% on the first $18,200, 16% on the next $26,800 (up to $45,000), and 30% on the remaining $5,000.
2025-26 income tax brackets (Australian residents)
| Taxable income | Tax rate | Tax on this bracket |
|---|---|---|
| $0 – $18,200 | 0% | Nil |
| $18,201 – $45,000 | 16% | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | 30% | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | 37% | $31,288 plus 37c for each $1 over $135,000 |
| $190,001+ | 45% | $51,638 plus 45c for each $1 over $190,000 |
The tax-free threshold
The first $18,200 of income earned by an Australian resident is completely tax-free. This is called the tax-free threshold. When you start a new job, your employer asks whether you want to claim the tax-free threshold — most people claim it from their main employer only. If you have multiple jobs, you should only claim it once.
How PAYG withholding works
Your employer withholds estimated tax from each pay under the Pay As You Go (PAYG) system. The amount withheld is based on ATO tax tables and assumes your current pay rate applies for the full year. At the end of the financial year, when you lodge your tax return, the ATO calculates your actual tax liability and reconciles it against what was withheld. If too much was withheld, you get a refund. If not enough, you receive a bill.
Tax offsets that reduce your bill
Tax offsets (also called rebates) directly reduce the amount of tax you owe. The most common is the Low Income Tax Offset (LITO), which provides up to $700 for taxpayers earning under $66,667. Unlike deductions (which reduce your taxable income), offsets reduce your actual tax payable dollar-for-dollar.
Other offsets include the Seniors and Pensioners Tax Offset (SAPTO) for those of Age Pension age, and the private health insurance rebate for those with eligible cover.
Marginal rate vs effective rate
Your marginal tax rate is the rate that applies to your next dollar of income — it is determined by your highest tax bracket. Your effective tax rate is the total tax you actually pay divided by your total income. Because Australia's system is progressive, your effective rate is always lower than your marginal rate.
For example, someone earning $100,000 has a marginal rate of 30% but an effective rate of approximately 23.3% (including Medicare levy). Understanding this difference is important when evaluating pay rises, overtime, or additional income.
Calculate your take-home pay
Use the Pay Calculator to see your exact take-home pay after income tax, Medicare levy, HECS, and super. Enter your salary and see results instantly — no sign-up required.