Understanding Australian Tax Brackets 2025-2026: A Complete Guide

Understanding how Australian tax brackets work is essential for every taxpayer. Whether you are a first-time employee, a seasoned professional, or planning for retirement, knowing how your income is taxed helps you make informed financial decisions and potentially reduce your tax liability legally.

What Are Tax Brackets and How Do They Work?

Tax brackets are income ranges that determine the rate at which your earnings are taxed. Australia uses a progressive tax system, which means that as your income increases, the tax rate applied to your additional earnings also increases. However, a common misconception is that moving into a higher tax bracket means all your income is taxed at the higher rate. This is not true.

In reality, only the portion of your income that falls within each bracket is taxed at that bracket's rate. For example, if you earn $50,000 per year, the first $18,200 is tax-free, the next portion up to $45,000 is taxed at 16%, and only the remaining amount above $45,000 is taxed at 30%. This graduated approach ensures that higher earners contribute more while protecting lower-income earners from excessive taxation.

Australian Tax Brackets for 2025-2026

The current tax brackets for Australian residents, effective from 1 July 2025, reflect the Stage 3 tax cuts that were implemented in July 2024. These changes provided significant relief for middle-income earners by reducing marginal tax rates and adjusting income thresholds.

The five tax brackets for the 2025-26 financial year are:

• $0 to $18,200: No tax payable (tax-free threshold)
• $18,201 to $45,000: 16 cents for each dollar over $18,200
• $45,001 to $135,000: $4,288 plus 30 cents for each dollar over $45,000
• $135,001 to $190,000: $31,288 plus 37 cents for each dollar over $135,000
• $190,001 and above: $51,638 plus 45 cents for each dollar over $190,000

These rates apply to Australian residents for tax purposes. Non-residents face different rates without access to the tax-free threshold, starting at 30% from the first dollar earned.

The Tax-Free Threshold Explained

The tax-free threshold is one of the most beneficial aspects of the Australian tax system for residents. It means the first $18,200 you earn each financial year is completely tax-free. This threshold has remained unchanged for several years and represents a significant benefit for all Australian taxpayers.

When you start a new job, you will complete a Tax File Number Declaration form where you can claim the tax-free threshold. It is important to note that you can only claim this threshold from one employer. If you have multiple jobs, you should claim the tax-free threshold from your main employer and have tax withheld at the higher rate from secondary employers to avoid a tax debt at the end of the year.

How to Calculate Your Income Tax

Calculating your income tax manually involves applying each bracket's rate to the relevant portion of your income. Let us work through an example for someone earning $85,000 per year.

First, the initial $18,200 is tax-free, resulting in zero tax. Next, the income from $18,201 to $45,000 (totaling $26,800) is taxed at 16%, which equals $4,288. Finally, the income from $45,001 to $85,000 (totaling $40,000) is taxed at 30%, which equals $12,000. Adding these together gives a total income tax of $16,288.

For quick and accurate calculations, you can use our free Australian tax calculator which automatically applies the correct tax brackets and includes Medicare levy calculations.

Marginal Tax Rate vs Effective Tax Rate

Understanding the difference between your marginal tax rate and effective tax rate is crucial for financial planning. Your marginal tax rate is the rate applied to your last dollar of income, while your effective tax rate is the overall percentage of your total income paid in tax.

Using our earlier example of an $85,000 income with $16,288 in tax, the marginal rate is 30% (the bracket where the income tops out), but the effective rate is only 19.2% ($16,288 divided by $85,000). This effective rate gives a more accurate picture of your actual tax burden.

Impact of the Stage 3 Tax Cuts

The Stage 3 tax cuts, introduced on 1 July 2024, brought significant changes to the tax landscape. Originally designed to flatten the tax structure, the revised cuts were modified to provide more benefit to lower and middle-income earners while still offering some relief to higher earners.

Key changes included reducing the 19% rate to 16% for incomes between $18,201 and $45,000, reducing the 32.5% rate to 30% for incomes between $45,001 and $135,000, and increasing the threshold for the 37% rate from $120,000 to $135,000. These changes mean most working Australians received a tax cut, with those earning between $45,000 and $135,000 seeing the largest percentage benefit.

Planning Around Tax Brackets

Strategic planning around tax brackets can help you minimize your tax liability. Common strategies include making concessional superannuation contributions to reduce your taxable income, timing the receipt of income (such as bonuses) to spread it across financial years, claiming all eligible deductions to reduce your taxable income, and considering salary packaging options where available.

It is important to note that while tax planning is perfectly legal and encouraged, aggressive tax avoidance schemes can attract attention from the Australian Taxation Office. Always ensure your tax strategies comply with current legislation.

Conclusion

Understanding how Australian tax brackets work empowers you to make better financial decisions. The progressive system ensures fairness while the tax-free threshold provides relief for all residents. By knowing your marginal and effective tax rates, you can plan your finances more effectively and potentially reduce your tax burden through legitimate means.

To quickly calculate your income tax based on the current 2025-26 tax brackets, use our free Australian tax calculator. It provides instant results including income tax, Medicare levy, and take-home pay calculations.