Tax Brackets Australia: How Marginal Tax Rates Actually Work
How tax brackets and marginal rates work in Australia. The 2024-25 brackets, a worked $90k example, effective vs marginal rate, and what Stage 3 changed.
By Timothy Hirou GaschereauPublished 8 min read
Try it yourself
Australia uses a progressive tax system. You don't pay one flat rate on your whole income: different slices of your income are taxed at different rates, and earning more never leaves you worse off overall. Here's exactly how tax brackets work for 2024-25. This is part of our guide to Australian income tax.
🎯 The essential: A tax bracket is a band of income taxed at a specific rate. Only the dollars that fall within a band are taxed at that band's rate, so your first $18,200 is always tax-free no matter what you earn. The 2024-25 resident rates are 0%, 16%, 30%, 37% and 45%.
What is a tax bracket?
A tax bracket is a band of income taxed at a specific rate. Australia has five of them for resident individuals in 2024-25, ranging from 0% up to 45%. The key thing to understand: your bracket does not determine the rate you pay on every dollar. It only determines the rate on the income that falls within that particular band.
Think of it like a set of buckets. Your income fills the first bucket, then the second, then the third. Each bucket has its own tax rate. You only pay the higher rate on the dollars that spill into the higher bucket, not on the ones already sitting in the lower ones. Most of the confusion people have about tax comes from treating brackets like a flat rate. They're not.
How marginal (progressive) tax actually works
Your marginal tax rate is the rate that applies to your next dollar of income. It's not the rate on your whole income. Here's the misconception we hear constantly: “I got a pay rise and it pushed me into a higher tax bracket, so now I'm taking home less.” This is false. It cannot happen under Australia's progressive system, because only the dollars above the new threshold get taxed at the higher rate.
Say you earn $44,000 and get a $2,000 raise to $46,000. You've crossed the $45,000 threshold into the 30% bracket. But only the $1,000 above $45,000 is taxed at 30%. The other $1,000 of your raise is still taxed at 16%. You are not worse off, you are better off by the after-tax value of the raise. That's what “progressive” means: the rate progresses upward, but only on each new slice.
The 2024-25 resident tax brackets
These are the rates for Australian residents for 2024-25 (1 July 2024 to 30 June 2025), following the Stage 3 tax cuts.
| Taxable income | Tax rate |
|---|---|
| $0 to $18,200 | 0% |
| $18,201 to $45,000 | 16% |
| $45,001 to $135,000 | 30% |
| $135,001 to $190,000 | 37% |
| Over $190,000 | 45% |
- The tax-free threshold is $18,200. You pay nothing up to this amount.
- The 16% rate (down from 19%) and the 30% rate (down from 32.5%) are both new from 1 July 2024.
- These rates apply to residents. Non-residents face higher rates with no tax-free threshold.
- The Medicare levy (2%) sits on top for most taxpayers.
Worked example: how a $90,000 salary is actually taxed
Let's run a real calculation for someone earning $90,000 in 2024-25. Each rate applies only to the slice of income within that bracket.
| Bracket | Income in bracket | Rate | Tax paid |
|---|---|---|---|
| $0 to $18,200 | $18,200 | 0% | $0 |
| $18,201 to $45,000 | $26,800 | 16% | $4,288 |
| $45,001 to $90,000 | $45,000 | 30% | $13,500 |
| Total | $90,000 | $17,788 |
Total income tax is $17,788, an effective rate of 19.8% ($17,788 / $90,000). The marginal rate is 30% (the rate on the last dollar), but the effective rate is just 19.8%. The 0% zone and the 16% zone drag the overall average well below the top rate. This is why quoting your bracket alone tells an incomplete story.
Effective tax rate vs marginal tax rate
These two numbers serve different purposes. Your effective tax rate is total tax divided by total income (19.8% in the example above). It's the true measure of your overall burden, and the number to use for budgeting or comparing your burden to someone else's. Your marginal tax rate is the rate on your next dollar. It's the number to use when making decisions at the margin: whether to take on extra freelance work, or how much a salary sacrifice arrangement will save you in tax.
A quick rule of thumb: use the effective rate for budgeting and comparison, use the marginal rate for decision-making. The effective rate tells you where you are; the marginal rate tells you what happens if you earn a bit more.
The Medicare levy: the 2% that sits on top
Income tax isn't the only thing coming out of your pay. Most Australian taxpayers also pay the Medicare levy, 2% of taxable income, which funds the public health system. For the $90,000 example, that's an extra $1,800. Low-income earners are exempt: if your taxable income is below $27,222 (2024-25) you pay no levy, with a reduced levy between $27,222 and $34,028. Higher earners without private hospital cover may also pay the Medicare Levy Surcharge on top.
What changed with the Stage 3 tax cuts
The Stage 3 tax cuts took effect from 1 July 2024. Here's the before and after:
| Bracket | Pre-July 2024 | From 1 July 2024 |
|---|---|---|
| $0 to $18,200 | 0% | 0% |
| Next band | 19% | 16% |
| Middle band | 32.5% (to $120k) | 30% (to $135k) |
| 37% band | 37% (from $120k) | 37% (from $135k) |
| Top band | 45% (over $180k) | 45% (over $190k) |
The key changes: the 19% rate was cut to 16%, the 32.5% rate was cut to 30% with its threshold extended to $135,000, the 37% bracket was retained, and the 45% threshold was raised from $180,000 to $190,000. The Albanese government redesigned the original Morrison-era package in early 2024 to spread more of the benefit to lower and middle income earners, and the legislation passed in February 2024.
The bottom line: tax brackets aren't a flat rate, and crossing into a higher one never makes you worse off overall. Know your effective rate for budgeting and your marginal rate for decisions, and remember the Medicare levy and any offsets sit on top. Run your own numbers with our salary calculator.
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❓ Frequently asked questions
Do I pay 30% tax on my whole salary if I earn $90,000?
+
No. Only the slice of income between $45,001 and $90,000 is taxed at 30%. The first $18,200 is tax-free, and the income from $18,201 to $45,000 is taxed at 16%. Your total income tax works out to $17,788, an effective rate of 19.8%.
What is the tax-free threshold in Australia?
+
For 2024-25, the tax-free threshold is $18,200. You pay no income tax on the first $18,200 of your taxable income. To claim it, you tick the tax-free threshold box on your Tax File Number declaration with your employer.
What is the difference between marginal and effective tax rate?
+
Your marginal tax rate is the rate on your next dollar of income. Your effective tax rate is your total tax divided by your total income. For a $90,000 salary, the marginal rate is 30% but the effective rate is 19.8%. Use the effective rate to understand your overall burden; use the marginal rate when deciding about extra income or deductions.
Does the Medicare levy apply to everyone?
+
Not quite. Most Australian residents pay the 2% Medicare levy, but low-income earners are exempt or pay a reduced amount. For 2024-25, the exemption threshold is $27,222 for most individuals. Some people (such as those with certain medical conditions or non-residents) may also be exempt.
What are the Stage 3 tax cuts and when did they start?
+
The Stage 3 tax cuts are income tax rate reductions that took effect from 1 July 2024. They cut the 19% rate to 16%, cut the 32.5% rate to 30%, and raised the thresholds for the 37% and 45% brackets. They were redesigned by the Albanese government in early 2024 from the original Morrison-era plan.
Are there any tax offsets that reduce what I owe?
+
Yes. The main one for most earners is the Low Income Tax Offset (LITO), up to $700 off your tax bill, phasing out for incomes above $37,500 and gone above $66,667. The old LMITO ended after 2021-22 and no longer applies. Seniors and pensioners may qualify for SAPTO.
📚 Recommended reading
The Barefoot Investor
Scott Pape
The Barefoot Investor
Scott Pape
Australia's best-selling money book ever. A simple system for accounts, budgeting, debt and a real emergency fund in one.
Making Money Made Simple
Noel Whittaker
Making Money Made Simple
Noel Whittaker
Australia's classic, comprehensive money guide covering tax, super and investing, updated for today.
On Your Own Two Feet
Helen Baker
On Your Own Two Feet
Helen Baker
An Aussie financial planner's essential guide to money independence for women, covering every life stage from single to separated. Warm, practical and genuinely on your side.
Some links above are affiliate links. If you buy through them, Snowball Invest may earn a small commission at no extra cost to you. We only recommend books we'd suggest anyway.
Sources
This article is general information only, not financial or tax advice. Tax rates, thresholds and offsets change over time, so check the latest ATO guidance and speak to a registered tax agent about your own situation.
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Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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