How income tax is calculated
Australian income tax is calculated on your taxable income — your gross income minus any allowable deductions. The tax system uses progressive marginal rates, meaning different portions of your income are taxed at different rates.
Your total tax bill is made up of several components:
- → Income tax — based on your taxable income and applicable brackets
- → Medicare levy — 2% of taxable income for most residents
- → Medicare Levy Surcharge — an additional 1–1.5% if you earn over $101,000 and don't hold private health insurance
- → HECS/HELP repayments — if you have a student loan and earn above the threshold
Tax offsets (like the LITO) then reduce the amount of tax you owe — but they don't reduce your taxable income.
Tax brackets for 2025–2026
Following the Stage 3 tax cuts which took effect 1 July 2024, Australia has the following income tax brackets for Australian residents:
| Taxable Income | Tax Rate | Tax on This Bracket |
|---|---|---|
| $0 – $18,200 | 0% | Nil |
| $18,201 – $45,000 | 16% | 16c per $1 over $18,200 |
| $45,001 – $135,000 | 30% | $4,288 + 30c per $1 over $45,000 |
| $135,001 – $190,000 | 37% | $31,288 + 37c per $1 over $135,000 |
| $190,001+ | 45% | $51,638 + 45c per $1 over $190,000 |
Source: ATO — Individual income tax rates. These rates apply to residents only. Non-residents are taxed at 16% from the first dollar.
Example: On a $80,000 salary, you pay: $0 on the first $18,200, plus $4,288 on $18,201–$45,000 (at 16%), plus $10,500 on $45,001–$80,000 (at 30%). Total income tax = $14,788. Before offsets.
Marginal vs effective tax rate
One of the most common misunderstandings about tax is the difference between your marginal rate and your effective rate.
Marginal Rate
The tax rate that applies to your last dollar of income. On an $80,000 salary, your marginal rate is 30% — but you only pay 30% on income between $45,001 and $80,000.
Effective Rate
Your total tax divided by your total income. On $80,000, you pay roughly $14,788 in income tax — an effective rate of about 18.5%.
This matters because a pay rise won't cause you to lose money. Even if a pay rise pushes you into a higher bracket, only the additional income is taxed at the higher rate — not your entire salary.
Tax offsets — Low Income Tax Offset (LITO)
Tax offsets directly reduce the amount of tax you owe (unlike deductions, which reduce your taxable income). The main offset for most Australians is the Low Income Tax Offset (LITO).
| Income Range | LITO Amount |
|---|---|
| $0 – $37,500 | Full $700 offset |
| $37,501 – $45,000 | Reduces by 5c per $1 above $37,500 |
| $45,001 – $66,667 | Reduces by 1.5c per $1 above $45,000 |
| $66,668+ | No offset |
Note: LMITO (Low and Middle Income Tax Offset) ended 30 June 2022. Only LITO applies from 2022-23 onwards.
Medicare levy
The Medicare levy is 2% of your taxable income and funds Australia's public healthcare system. Most residents pay it automatically — it's added on top of your income tax.
Exemptions: Low-income earners may pay a reduced levy or none at all. For 2025–2026:
- Singles earning under $29,207 — no Medicare levy
- Singles earning $29,207–$36,509 — reduced levy (shade-in range)
- Singles earning $36,509+ — full 2% levy
- Medicare Entitlement Statement holders — exempt
Medicare Levy Surcharge (MLS)
If you earn over $101,000 (single) or $202,000 (family) and don't hold private hospital cover, you pay an additional Medicare Levy Surcharge on top of the standard levy:
| Income (Single) | Surcharge Rate |
|---|---|
| $101,000 – $118,000 | 1.0% |
| $118,001 – $158,000 | 1.25% |
| $158,001+ | 1.5% |
For many people earning $101,000–$120,000, taking out private health insurance is cheaper than paying the surcharge. Use our calculator to see whether you're in the surcharge zone.
HECS/HELP repayments
If you have a HECS-HELP (student loan) debt, repayments are compulsory once your income exceeds the minimum repayment threshold — approximately $54,000 for 2025–2026.
Repayments are calculated as a percentage of your total income (including your employer's super contributions for surcharge purposes). The rate increases in steps as your income rises, from around 1% to 10%. Your employer withholds this through the PAYG system if you've ticked the HECS box on your Tax File Number declaration.
Reducing your tax bill
There are several legitimate ways to reduce your income tax in Australia:
Salary sacrifice into super
Contributions from pre-tax salary are taxed at 15% — much lower than most people's marginal rate. You can contribute up to $30,000 (concessional cap) per year including your employer's SG contributions.
Super sacrifice calculator →Claim all eligible deductions
Work-related expenses, vehicle costs, home office expenses, union fees, and self-education costs can all be deductible. Keep receipts throughout the year.
Tax return estimator →Novated lease (salary sacrifice for a car)
Package a car through your employer with pre-tax income. Electric vehicles under $91,387 are FBT-exempt, making this especially attractive.
Novated lease calculator →Private health insurance (avoid MLS)
If you earn over $101,000, private hospital cover may cost less than the Medicare Levy Surcharge you would otherwise pay.
Check your MLS exposure →Frequently asked questions
What are the income tax brackets in Australia for 2025-26?
For 2025-26: $0–$18,200 at 0%, $18,201–$45,000 at 16%, $45,001–$135,000 at 30%, $135,001–$190,000 at 37%, and $190,001+ at 45%. These are marginal rates — you only pay each rate on income within that bracket.
What is the difference between marginal and effective tax rate?
Your marginal rate is the tax rate on your last dollar of income. Your effective rate is the total tax paid divided by your total income. On an $80,000 salary, your marginal rate is 30% but your effective rate is around 18.5%.
What is the Low Income Tax Offset (LITO)?
The LITO is a tax offset of up to $700 for low-income earners. It reduces the tax you owe (not your taxable income). For 2025-26, the full $700 applies up to $37,500 and phases out completely at $66,667.
Do I have to pay the Medicare Levy?
Most Australian residents pay 2% Medicare levy. Low-income earners below ~$26,000 may be exempt or pay a reduced levy. Medicare Entitlement Statement holders are also exempt.
How does HECS-HELP repayment work?
From 2025-26, HECS/HELP uses a new marginal repayment system. Repayments are mandatory once your income exceeds $67,000. The marginal rate on income above the threshold rises in steps — from 1% just above $67,000 up to 20% on income over $180,000. Repayments are collected through the tax system via PAYG withholding or your tax return.