How income tax is calculated
Australian income tax is calculated on your taxable income — generally your salary, wages, investment income, and other assessable 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 your MLS income exceeds $101,000 and you don't hold eligible hospital cover
- → HECS/HELP repayments — if you have a student loan and earn above $67,000
Tax offsets (like the LITO) then reduce the amount of tax you owe — but they don't reduce your taxable income.
If you are trying to work out what can still be claimed before lodgment, our tax return checklist is the practical companion to this guide.
Deductions vs offsets
A deduction lowers your taxable income. A tax offset lowers the tax payable after your tax has been calculated. This is why a $1,000 deduction and a $1,000 offset do not produce the same result.
Tax brackets for 2025–2026
Following the Stage 3 tax changes that took effect on 1 July 2024, Australian residents who are entitled to the full tax-free threshold use the following brackets for 2025–2026:
| 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 |
Explore how income tax changes with pay
Drag the slider to see how each dollar flows through the tax brackets.
$80,000
| Band | Amount | Rate | Outcome |
|---|---|---|---|
$0 – $18,200 | $18,200 | 0% | Keep $18,200 Tax $0 |
$18,201 – $45,000 | $26,799 | 16% | Keep $22,511 Tax $4,288 |
$45,001 – $135,000 | $34,999 | 30% | Keep $24,499 Tax $10,500 |
Why this matters
Your marginal rate is 30%, but your whole income is not taxed at 30%. Lower slices of income still use the lower bands, which is why your effective rate is only 18.5%.
Income tax only. Does not include Medicare levy, HECS/HELP, tax offsets (LITO), salary sacrifice, or other deductions.
This interactive example shows income tax only. For full take-home pay including Medicare levy, HECS/HELP, super, and deductions, use the pay calculator.
Source: ATO — Tax rates for Australian residents. These rates apply to Australian residents for tax purposes who are entitled to the full tax-free threshold. If you're a foreign resident, use the ATO's separate residency and foreign-resident tax guidance instead of this table.
Example: On an $80,000 taxable income, you pay $0 on the first $18,200, plus $4,288 on $18,201 – $45,000, plus $10,500 on $45,001 – $80,000. Total income tax is $14,788 before offsets and before the Medicare levy.
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 that rate 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 |
Source: ATO — Low income tax offset. Note: LMITO (Low and Middle Income Tax Offset) ended on 30 June 2022, so only LITO applies for current years.
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 up to $29,207 — generally no Medicare levy
- Singles earning between $29,207 and about $36,509 — reduced levy (shade-in range)
- Singles earning above about $36,509 — full 2% levy
- Medicare Entitlement Statement holders — exempt
Source: ATO — Medicare levy. Family thresholds and special rules for SAPTO recipients also apply.
Medicare Levy Surcharge (MLS)
If your income for MLS purposes is above the threshold and you don't hold appropriate private hospital cover, you may pay an additional Medicare Levy Surcharge on top of the standard levy:
| Income (Single) | Surcharge Rate |
|---|---|
| $101,001 – $118,000 | 1% |
| $118,001 – $158,000 | 1.3% |
| $158,001+ | 1.5% |
MLS income is broader than salary alone and can include reportable fringe benefits, net investment losses, and reportable super contributions. For many people close to the threshold, taking out hospital cover costs less than paying the surcharge. Use our calculatorto estimate whether you're in the surcharge zone.
If private hospital cover, rebate adjustments, or reportable income items are the part you want to unpack, the dedicated Medicare Levy Surcharge guide goes deeper into the rules.
Source: ATO — Medicare levy surcharge thresholds and rates. Family thresholds start at $202,000 and increase by $1,500 for each dependent child after the first.
HECS/HELP repayments
If you have a HECS-HELP debt, compulsory repayments start once your repayment income exceeds $67,000 for 2025–2026.
From 1 July 2025, repayments use a marginal system rather than a single percentage on your whole income. For repayment income between $67,001 and $125,000, the repayment is 15c per dollar above $67,000. Between $125,001 and $179,285, it is $8,700 plus 17c per dollar above $125,000. At $179,286 or more, it is 10% of total repayment income.
Repayment income is broader than taxable income. It includes taxable income plus amounts such as reportable fringe benefits, reportable super contributions, net investment losses, and exempt foreign employment income. Your employer can withhold extra PAYG if you tick the study loan box on your TFN declaration, but the final amount is reconciled in your tax return.
If HELP is a major part of your tax position, read the dedicated HECS/HELP repayment guide for the threshold tables, indexation timing, and voluntary repayment trade-offs.
Source: ATO — Study and training loan repayment thresholds and rates.
Reducing your tax bill
If you want to lower tax using mainstream strategies, these are the levers most employees tend to review first:
Salary sacrifice into super
Pre-tax super contributions are generally taxed at 15% inside the fund. For many employees, that is more favourable than taking the cash and paying tax at their marginal rate. Just remember the $30,000 concessional cap includes employer SG.
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 checklist →Novated lease (salary sacrifice for a car)
If your employer offers salary packaging, a novated lease can reduce after-tax car costs. The tax case is usually strongest for eligible EVs under $91,387, because those vehicles are exempt from FBT.
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.
Read the MLS guide →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%, $190,001+ at 45%. These are marginal rates, so you only pay each rate on the slice of income that falls 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 your total tax divided by your total income. On an $80,000 salary, your marginal rate is 30% but your effective income-tax rate is about 18.5% before the Medicare levy.
What is the Low Income Tax Offset (LITO)?
The LITO is a non-refundable tax offset of up to $700 for lower-income earners. It reduces the tax you owe rather than your taxable income. For 2025-26, the full $700 applies up to $37,500 and phases out completely once taxable income reaches $66,667.
Do I have to pay the Medicare levy?
Most Australian residents pay a Medicare levy of 2% of taxable income. For 2025-26, singles on taxable income up to $29,207 generally pay no levy, and the levy phases in until the full 2% applies above about $36,509. Separate family and SAPTO thresholds also apply.
How do HECS-HELP repayments work?
From 1 July 2025, HECS-HELP uses a marginal repayment system. Repayments start once your repayment income exceeds $67,000. Between $67,001 and $125,000, the repayment is 15c per dollar above $67,000; between $125,001 and $179,285, it is $8,700 plus 17c per dollar above $125,000; and at $179,286 or more it is 10% of total repayment income.
