What is the Marginal Tax Rate?

The basic concept

Your marginal tax rate is simply what percentage of your next dollar goes to the ATO. Australia runs a progressive system: think of it like filling buckets from the bottom up, each bucket has its own rate, and you only move into the next bucket once the one below it is full. Taxable income is what determines which buckets apply to you.

Australia's 2026-27 tax brackets

For Australian resident individuals, excluding the Medicare levy:

• $0 to $18,200: 0%
• $18,201 to $45,000: 15%
• $45,001 to $135,000: 30%
• $135,001 to $190,000: 37%
• $190,001 and above: 45%

That 15% second bracket is worth knowing the history of. It dropped from 16% to 15% on 1 July 2026 under the Treasury Laws Amendment (Cost of Living Tax Cuts) Act 2024, part of the same legislation that reworked the old Stage 3 tax cuts. A further cut to 14% for that same bracket is already legislated to take effect from 1 July 2027, it's locked in law now, not just an announcement waiting on a future budget. Different rates apply to non-residents and working holiday makers, this table is for Australian tax residents only.

Marginal vs effective (average) tax rate

These two get mixed up constantly. Your marginal rate is the rate on your next dollar, the top bracket you've reached. Your effective, or average, rate is your total tax divided by your total income, and because your earlier dollars were taxed at the lower brackets first, your effective rate is always meaningfully below your marginal rate.

A worked example

Say your taxable income is $90,000 for 2026-27. The first $18,200 is tax-free. The next $26,800 (up to $45,000) is taxed at 15%, that's $4,020. The remaining $45,000 (from $45,001 to $90,000) is taxed at 30%, that's $13,500. Total income tax comes to $17,520. Add the 2% Medicare levy on the full $90,000, another $1,800, for a total tax bill of $19,320. Your marginal rate, including the Medicare levy, is 32% (30% plus 2%), but your effective rate is only about 21.5% of your total income. Run your own numbers with our Salary & Take-Home Pay Calculator.

The Medicare levy sits on top

The Medicare levy adds another 2% of taxable income for most residents, on top of whatever bracket rate applies, with a reduced or nil levy for low-income earners below a shade-in threshold. Higher earners who don't hold private hospital cover can also be liable for the Medicare Levy Surcharge, an extra 1% to 1.5% on top of that again.

Reducing your taxable income, not the brackets

You can't change the brackets themselves, but you can reduce how much of your income sits in the higher ones. Common ways include salary sacrificing into super, claiming legitimate work-related and investment deductions, and negative gearing an investment property. All of these lower your taxable income rather than your tax rate, but since they shave dollars off the top, they're worth the most to people already in a higher bracket.

Common misconceptions

"Earning more could leave me with less after tax." False. Only the dollars above a given threshold are taxed at the higher rate, a pay rise always increases your after-tax income, never decreases it. "My marginal rate is what I pay on everything." No, that's what your effective rate measures, your marginal rate only applies to your last dollar. "The tax-free threshold is a flat $18,200 for everyone." Technically correct as a formal threshold, but the Low Income Tax Offset, up to $700 and phasing out between roughly $37,500 and $66,667 of taxable income, effectively pushes the point where you start paying meaningful tax higher again for lower earners.