Many people worry a pay rise will push them into a higher tax bracket and leave them worse off. It won’t. Here’s how Australia’s income tax brackets actually work.
Australia taxes income using a progressive system. Rather than one flat rate, income is divided into brackets, and each bracket is taxed at its own rate.
For Australian residents in the 2026-27 financial year, the rates are:
The 2026-27 rates
Income up to $18,200 is tax-free. This is known as the tax-free threshold.
Income from $18,201 to $45,000 is taxed at 15 cents for each dollar.
Income from $45,001 to $135,000 is taxed at 30 cents for each dollar.
Income from $135,001 to $190,000 is taxed at 37 cents for each dollar.
Income above $190,000 is taxed at 45 cents for each dollar.
Most people also pay the Medicare levy, which is 2% of taxable income.
How the brackets work
The key point is that each rate only applies to the income within its bracket.
Take someone earning $100,000. They pay nothing on the first $18,200, 15% on the next $26,800, and 30% on the remaining $55,000. Their total income tax is about $20,500, plus the Medicare levy. Their average tax rate is far lower than 30%, even though that’s their top rate.
If they get a pay rise to $140,000, only the $5,000 above $135,000 is taxed at 37%. Everything below that is taxed exactly as before. That’s why a pay rise can never leave you with less money after income tax.
Bracket creep
Australia’s thresholds aren’t automatically adjusted for inflation. As wages rise over time, more of people’s income moves into higher brackets, so they pay a larger share of their income in tax even if their pay only keeps pace with prices. This is known as bracket creep.
Governments periodically cut tax rates or lift thresholds to hand back some of that extra revenue. The Stage 3 tax cuts, which took effect in July 2024, cut the second-lowest rate from 32.5% to 30% and reshaped the top brackets. The lowest rate then fell from 16% to 15% in July 2026, and is legislated to fall to 14% from July 2027.
Offsets and deductions
Your tax bill also depends on deductions, such as work-related expenses, which reduce your taxable income, and offsets, such as the low income tax offset, which reduce the tax you pay.
Tax is withheld from your pay each payday, and your final bill is worked out when you lodge your tax return after 30 June. If too much was withheld, you get a refund. If too little, you’ll owe the difference.
Non-residents and working holiday makers are taxed at different rates.
