Australian Income Tax in 2025–26

How Australian income tax actually works

Australia uses a progressive marginal-bracket system. Higher income is taxed at higher rates, but only on the portion within each bracket. Earning $1 more than the bottom of a bracket doesn't suddenly tax all your previous income at the higher rate — only that $1 above the threshold gets the higher rate. This is one of the most common misconceptions about Australian tax and a frequent reason people misunderstand what a pay rise is "worth" net of tax.

Your tax is calculated on your taxable income, which is your assessable income (salary, business income, rental income, interest, dividends, net capital gains) minus your allowable deductions (work-related expenses, donations, certain super contributions, investment expenses). Then on top of base tax, you may pay Medicare Levy (almost everyone), Medicare Levy Surcharge (if you're a higher earner without private hospital cover), and HECS-HELP repayments (if you have an outstanding student loan).

2025–26 resident tax brackets

Following the revised Stage 3 cuts effective 1 July 2024, the brackets for Australian tax residents in 2025–26 are:

Note: non-residents for tax purposes pay tax from the first dollar (no $18,200 tax-free threshold), at non-resident rates that step up to 45% at the same $190K threshold. Working holiday makers (subclass 417 / 462) have their own schedule, generally 15% on the first $45,000 then standard non-resident rates above.

Worked example — $95,000 in 2025–26

An Australian resident on a $95,000 salary, with the Medicare Levy and no HECS debt, would pay:

Effective tax rate is $21,188 / $95,000 = 22.3%. Marginal tax rate (on the next dollar earned) is 32% — the 30% bracket plus the 2% Medicare Levy.

Low Income Tax Offset (LITO)

The LITO reduces tax payable for lower-income earners. For 2025–26:

• Maximum offset: $700 at incomes up to $37,500
• Phases out at 5c per dollar between $37,501 and $45,000 → $325 at $45,000
• Then phases out at 1.5c per dollar between $45,001 and $66,667 → zero at $66,667
• Cannot reduce tax below zero (it's an offset, not a refundable credit)

The LITO effectively raises the tax-free threshold for low-income earners. A worker on exactly $37,500 has base tax of $3,088, less LITO $700, leaves $2,388. Combined with the 2% Medicare Levy of $750 (reduced at this income), total tax is around $2,388 + $300 (shaded-in Medicare) = roughly $2,688 on $37,500. Effective rate of about 7%.

Medicare Levy & Medicare Levy Surcharge

The Medicare Levy is 2% of your taxable income, funding the public health system. Almost all residents pay it. For low-income earners, the levy is reduced or waived under a "shading-in" formula — at $27,222 (the 2025–26 single threshold) the levy is zero, then phases in at 10c per dollar until full 2% applies above about $34,000 (single, no senior/pensioner relief).

The Medicare Levy Surcharge (MLS) is an additional 1%–1.5% surcharge for higher earners without private hospital cover. The 2025–26 single tiers are roughly: Tier 1 ($97,001–$113,000) at 1%; Tier 2 ($113,001–$151,000) at 1.25%; Tier 3 ($151,001+) at 1.5%. Family thresholds are roughly double, with a small uplift per dependent child.

Crucially, the MLS thresholds are cliffs, not gradients. Earn $1 over the threshold and the entire MLS applies to your whole income, not just the dollar over. At $97,001 with no private hospital cover, you pay 1% of $97,001 = $970. Private hospital cover that costs less than the surcharge is therefore strictly better than paying the surcharge — and that's the design intent.

HECS-HELP repayments

HECS-HELP is the federal government's interest-free (but CPI/WPI-indexed) loan scheme for university and approved vocational education fees. Repayments are compulsory once your repayment income exceeds a threshold ($54,435 in 2025–26). Repayments scale from 1% at the bottom threshold to 10% at incomes above $159,664. They're collected through PAYG withholding and reconciled at tax time.

Since 2024 legislation, the annual indexation on your accumulated HECS-HELP debt is the lower of CPI and the Wage Price Index, with retrospective effect to 2023. This is materially friendlier than the prior CPI-only rule in high-inflation years. Indexation is applied on 1 June each year, before that year's compulsory repayments are credited — so voluntary lump sums made before 1 June can blunt the indexation impact.

Repayment income is your taxable income plus reportable fringe benefits, exempt foreign income and net investment losses. So a HECS-burdened salary earner who also negative-gears an investment property pays HECS on the gross salary before the rental loss is deducted — the negative gearing helps with income tax but not with HECS.

What happened to the Stage 3 tax cuts

The legislated Stage 3 cuts took effect on 1 July 2024 after a politically charged revision. The original 2018 design (Stage 3 only) would have flattened the schedule to a single 30% rate between $45,000 and $200,000 plus a 45% rate above $200K. The revised package — passed in February 2024 — lowered the bottom 19% rate to 16% (helping low-and-middle earners), kept a progressive 30% middle band but extended it to $135,000 (not the originally proposed $200K), and raised the 37% threshold from $120,000 to $135,000 and the 45% threshold from $180,000 to $190,000.

Every resident taxpayer pays less personal income tax than they would have under the pre-cut schedule. The Stage 3 redesign shifted the benefit slightly toward middle-income earners compared to the original 2018 design, but high-income earners still received a meaningful absolute reduction in marginal tax.

Salary sacrifice into super

One of the most effective tax-planning levers for Australian salary earners is salary-sacrificed superannuation contributions. Sacrificed amounts come out of your gross salary before tax. Inside super, they're taxed at the concessional rate of 15% (or 30% under Division 293 if combined income + concessional contributions exceed $250,000), rather than your marginal income-tax rate.

On a $95,000 salary at a 32% marginal rate (30% + 2% Medicare), sacrificing $10,000 to super saves $3,200 in personal income tax. Inside super, the $10,000 is taxed at 15% ($1,500), so net to super is $8,500. You end up $1,700 better off in net wealth terms ($8,500 in super vs the $6,800 you would have netted in your pocket after tax), with the same gross-of-super take-home in your account.

The 2025–26 concessional cap is $30,000 (employer SG + salary sacrifice + personal deductible contributions combined). Carry-forward of unused caps from the prior five years is available if your total super balance was under $500,000 at the previous 30 June.

Marginal rate vs effective rate — the distinction

Your marginal tax rate is the rate paid on the next dollar earned. Your effective tax rate is total tax divided by total income. Effective is always lower than marginal under a progressive system. Examples for 2025–26:

• $45,000 — marginal 18% (16% + 2% Medicare), effective ~9.5%
• $95,000 — marginal 32%, effective ~22.3%
• $160,000 — marginal 39% (37% + 2%), effective ~27.3%
• $220,000 — marginal 47% (45% + 2%), effective ~31.6%

A pay rise from $134,500 to $135,500 doesn't suddenly tax your old income at 37%. Only the $500 above the $135,000 threshold gets the 37% rate; the $500 below stays in the 30% bracket. Total tax on the $1,000 raise is about $320 — not 7% of your whole salary.

Frequently asked questions