Most Australians overpay tax simply because they do not fully understand how the system works. This guide explains Australian income tax in plain, honest language — from marginal rates to offsets, deductions and the strategies worth knowing.
There is a persistent and costly misconception about how Australian income tax works: that moving into a higher tax bracket means paying that higher rate on all your income.
This is incorrect — and misunderstanding it leads people to make genuinely poor financial decisions, including turning down pay rises, avoiding investment income, and feeling more burdened by tax than the system actually imposes.
Understanding how Australian income tax actually works is one of the most valuable pieces of financial knowledge an Australian can have.
Australia uses a progressive tax system. The higher rates apply only to income above each threshold — not to your entire income.
The 2025-26 tax rates for Australian residents are:
| Income | Tax Rate |
|---|---|
| $0 – $18,200 | 0% (tax-free threshold) |
| $18,201 – $45,000 | 19% on income above $18,200 |
| $45,001 – $120,000 | 32.5% on income above $45,000 |
| $120,001 – $180,000 | 37% on income above $120,000 |
| $180,001+ | 45% on income above $180,000 |
A practical example: Someone earning $90,000 does not pay 32.5% on their entire income. They pay zero on the first $18,200, 19% on the next $26,800, and 32.5% on the remaining $45,000. Their total tax is approximately $20,797 — an effective rate of around 23.1%, not 32.5%.
Most Australians earning under $66,667 receive the Low Income Tax Offset, which reduces their tax payable by up to $700. This means many Australians with modest incomes pay less tax than the standard rate table suggests.
On top of income tax, most Australian residents pay a Medicare Levy of 2% of their taxable income. This funds the public healthcare system. Some low-income earners are exempt or pay a reduced levy.
If you earn above $93,000 as a single person and do not have private hospital cover, you may also pay the Medicare Levy Surcharge (an additional 1–1.5%).
If you have a HECS-HELP debt from tertiary education, repayments are collected through the tax system once your income exceeds $54,435 (2025-26). These are additional amounts on top of your income tax — not part of the tax rate itself.
Tax deductions reduce your taxable income — meaning they are worth your marginal tax rate, not a dollar-for-dollar reduction in tax. Common deductions for Australian employees include:
The ATO requires that you keep records (receipts or logs) for any deduction you claim.
Contributions to superannuation are taxed at 15% — significantly below most people's marginal rate. This is what makes salary sacrifice into super one of the most tax-effective strategies available to Australian employees.
The concessional contributions cap (salary sacrifice + employer contributions) is $30,000 per year in 2025-26. Any unused cap from the previous five years can be carried forward if your total super balance is under $500,000.
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