Australian Income Tax Explained
Australia uses a progressive tax system — the more you earn, the higher the rate you pay on the top portion of your income. Critically, you only pay each rate on income within that bracket, not on your entire salary. Understanding how your tax is calculated helps you plan your finances, negotiate your salary, and estimate after-tax returns on investments.
2025–26 Tax Rates for Australian Residents
The 2025–26 tax year rates reflect the Stage 3 tax cuts, which came into effect on 1 July 2024. These were a significant restructure compared to prior years.
| Taxable Income | Tax on This Income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 + 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 + 37c for each $1 over $120,000 |
| $180,001+ | $51,667 + 45c for each $1 over $180,000 |
These rates do not include the Medicare levy or tax offsets.
Medicare Levy
Most Australian residents pay the Medicare levy on top of income tax. The standard rate is 2% of taxable income. There is a low-income threshold — for the 2024–25 year, individuals with taxable income below approximately $26,000 are exempt. A reduced levy applies between the threshold and approximately $32,500.
The Medicare levy surcharge (MLS) — a separate 1%–1.5% charge — applies to higher-income earners who do not hold an appropriate level of private hospital cover. The MLS applies at incomes above $93,000 (singles) or $186,000 (families). This calculator does not include MLS — check with your insurer or tax agent if this applies to you.
Low Income Tax Offset (LITO)
The LITO reduces the income tax payable for Australian residents on lower to middle incomes. For 2025–26:
- Income up to $37,500: maximum offset of $700
- $37,501–$45,000: offset reduces by 5 cents per dollar above $37,500
- $45,001–$66,667: offset reduces by 1.5 cents per dollar above $45,000
- Over $66,667: no offset
The LITO is applied against tax payable — it cannot generate a refund. Combined with the tax-free threshold, the LITO effectively raises the no-tax threshold to approximately $21,884 for residents.
How to Calculate Your Take-Home Pay
- Calculate gross income tax using the bracket rates above
- Deduct the LITO (if applicable)
- Add the Medicare levy (2% of income, minus any low-income reduction)
- Total tax = income tax after LITO + Medicare levy
- Net take-home pay = gross income − total tax
Example — $85,000 salary, Australian resident:
- Income tax: $5,092 + ($85,000 − $45,000) × 32.5% = $5,092 + $13,000 = $18,092
- LITO: $0 (income exceeds $66,667 phase-out)
- Medicare levy: $85,000 × 2% = $1,700
- Total tax: $18,092 + $1,700 = $19,792
- Net take-home: $85,000 − $19,792 = $65,208 ($5,434/month)
- Effective tax rate: $19,792 ÷ $85,000 = 23.3%
Marginal Rate vs. Effective Rate
Your marginal rate is the rate applied to your next dollar of income — it tells you how much of any pay rise you actually keep. At $85,000, the marginal rate is 34.5% (32.5% income tax + 2% Medicare levy).
Your effective rate is your total tax as a percentage of gross income — it reflects your actual average tax burden. Someone earning $85,000 pays an effective rate of about 23.3%, even though their marginal rate is 34.5%. This distinction matters for decisions like salary sacrifice into superannuation.
Salary Sacrifice and Superannuation
Concessional (pre-tax) superannuation contributions are taxed at 15% within the fund — below most workers' marginal income tax rate. Salary-sacrificing the difference between your marginal rate and 15% can meaningfully reduce your tax bill. The concessional contributions cap for 2025–26 is $30,000 (including employer contributions). Consult a financial adviser before adjusting your super strategy.