How Australian Income Tax is Calculated in 2025
Understanding how income tax is calculated in Australia can seem complex, but this comprehensive guide breaks down every component to help you understand exactly how much tax you'll pay and why.
Australian Tax Brackets for 2024-25 and 2025-26
Australia uses a progressive tax system, meaning different portions of your income are taxed at different rates. The more you earn, the higher the rate on the top portion of your income.
Tax Rates for 2024-25
| Taxable Income | Tax Rate |
|---|---|
| $0 – $18,200 | 0% (Tax-free threshold) |
| $18,201 – $45,000 | 16% on income over $18,200 |
| $45,001 – $135,000 | $4,288 + 30% on income over $45,000 |
| $135,001 – $190,000 | $31,288 + 37% on income over $135,000 |
| $190,001 and above | $51,638 + 45% on income over $190,000 |
Tax Rates for 2025-26
For the 2025-26 financial year, the tax brackets remain largely similar with some adjustments to the thresholds:
| Taxable Income | Tax Rate |
|---|---|
| $0 – $18,200 | 0% (Tax-free threshold) |
| $18,201 – $45,000 | 16% on income over $18,200 |
| $45,001 – $135,000 | $4,288 + 30% on income over $45,000 |
| $135,001 – $190,000 | $31,288 + 37% on income over $135,000 |
| $190,001 and above | $51,638 + 45% on income over $190,000 |
Understanding Tax Calculation Components
1Taxable Income
Your taxable income is your total income minus any deductions. This is the figure used to calculate your income tax. If your salary includes superannuation, you'll need to subtract the super component (typically 11.5%) to get your taxable income.
Example
If your total package is $100,000 including super:
Superannuation: $100,000 × 11.5% = $11,500
Taxable Income: $100,000 - $11,500 = $88,500
2Low Income Tax Offset (LITO)
The Low Income Tax Offset is a tax benefit that reduces the amount of tax you pay if your taxable income is below a certain threshold.
- Full offset ($700): For taxable incomes up to $37,500
- Partial offset: Reduces by 5 cents for every dollar between $37,500 and $45,000
- Additional reduction: Reduces by 1.5 cents for every dollar between $45,000 and $66,667
- No offset: For taxable incomes above $66,667
3Medicare Levy
The Medicare Levy is 2% of your taxable income and helps fund Australia's public healthcare system. Most Australian residents pay this levy, though there are exemptions and reductions for low-income earners.
Example
On a taxable income of $80,000:
Medicare Levy = $80,000 × 2% = $1,600
4Medicare Levy Surcharge (MLS)
If you don't have private hospital cover and your income is above certain thresholds, you may need to pay the Medicare Levy Surcharge in addition to the standard Medicare Levy.
| Income (Singles) | MLS Rate |
|---|---|
| $97,000 or less | 0% |
| $97,001 - $113,000 | 1.0% |
| $113,001 - $151,000 | 1.25% |
| $151,001 and above | 1.5% |
5HECS-HELP Repayment
If you have a HECS-HELP debt (student loan), you're required to make compulsory repayments once your income reaches the repayment threshold. The repayment rate increases progressively with your income.
For 2024-25, repayment rates range from 1% of income for those earning above $51,550, up to 10% for incomes above $151,200. The exact threshold and rates are updated annually by the ATO.
Step-by-Step Tax Calculation Example
Let's calculate the tax for someone earning $85,000 in the 2024-25 financial year with no HECS debt and no private health insurance:
Step 1: Calculate Income Tax
First $18,200: $0
$18,201 - $45,000: (26,800 × 16%) = $4,288
$45,001 - $85,000: (40,000 × 30%) = $12,000
Total Income Tax: $16,288
Step 2: Apply LITO
Income is above $66,667, so no LITO applies.
Step 3: Calculate Medicare Levy
$85,000 × 2% = $1,700
Step 4: Calculate Medicare Levy Surcharge
Income is below $97,000, so no MLS applies.
Final Calculation
Total Tax: $16,288 + $1,700 = $17,988
Take-Home Pay: $85,000 - $17,988 = $67,012
Effective Tax Rate: 21.16%
Frequently Asked Questions
What is the tax-free threshold?
The tax-free threshold is $18,200. This means you don't pay any tax on the first $18,200 of your income. If you earn less than this amount, you typically won't pay any income tax (though you may still pay the Medicare Levy).
How does progressive taxation work?
Progressive taxation means that different portions of your income are taxed at different rates. You don't pay the highest rate on all your income - only on the portion that falls into each bracket. This is why two people in the same tax bracket might pay different amounts of tax.
When do I need to pay the Medicare Levy Surcharge?
You need to pay the Medicare Levy Surcharge if you don't have adequate private hospital cover and your income exceeds $97,000 (singles) or $194,000 (families). The surcharge is designed to encourage higher-income earners to take out private hospital cover.
How is my HECS-HELP repayment calculated?
HECS-HELP repayments are calculated as a percentage of your total income (not just your taxable income). The percentage increases as your income increases. Your employer typically withholds these repayments from your pay, or you can pay them when you lodge your tax return.
What if I have multiple jobs or income sources?
If you have multiple jobs or income sources, you'll need to add all your income together to determine your total taxable income. This total income is then used to calculate your tax liability. Be aware that each employer may withhold tax based only on what they pay you, which could result in under-withholding if your combined income pushes you into a higher tax bracket.
Try Our Free Tax Calculator
Want to see exactly how much tax you'll pay? Use our free Australian Tax Calculator to get an instant breakdown of your income tax, Medicare Levy, and take-home pay.
Calculate Your Tax Now →Important Considerations
- These are estimates: The calculations shown are based on standard tax rates and don't account for specific deductions, tax offsets (other than LITO), or special circumstances.
- Tax rates change: The ATO updates tax rates, thresholds, and offsets regularly. Always check the current year's rates when doing your calculations.
- Seek professional advice: For complex tax situations, investment income, or business income, consult a qualified tax professional or accountant.
- Lodge your return: Even if you've had tax withheld from your pay, you still need to lodge a tax return each year (unless you're specifically exempted).
Conclusion
Understanding how Australian income tax is calculated helps you better plan your finances and ensures there are no surprises at tax time. The progressive tax system, combined with offsets like LITO and additional levies like Medicare Levy and potential surcharges, creates a calculation that can seem complex but follows clear rules.
By breaking down each component and understanding how they interact, you can accurately estimate your tax liability and make informed financial decisions. Remember to use our free tax calculator to get a personalized estimate based on your specific circumstances.
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