The 2026-27 Federal Budget was handed down on 12 May 2026 and included several announcements that directly affect take-home pay, PAYG withholding, and the conversations Australian employers have with their staff about pay. The headline measures include a drop in the second marginal tax rate from 16% to 15% from 1 July 2026, a $1,000 instant work-related expense deduction for workers, and a new $250 Working Australians Tax Offset starting 2027-28.
This is a snapshot of what was announced, what stage each measure is at, and what each announcement might mean for an Australian employer or payroll team in plain English. None of this is tax advice. Most measures still need to pass Parliament before they take effect. Where individual circumstances matter, the only sensible step is a conversation with a registered tax agent.
Published: May 2026
This piece covers the Budget announcements that affect:
The wider Budget snapshot covering business tax measures, property tax changes, and trust reforms is covered separately.
Before stepping through the measures, it is worth noting that almost everything below is an announcement, not law. Tax rate changes and PAYG withholding tables update annually based on legislation that typically passes before 1 July. Some Budget announcements pass quickly. Others get delayed, modified, or scrapped between announcement and enactment.
For employers, the practical implication is that payroll software providers will update PAYG withholding tables once legislation passes (or in some cases ahead of legislation if the change is highly likely). Manual payroll calculations would need the legislated rates, which are normally available from the ATO in May or June of each year.
The dates below are the announced commencement dates, all subject to legislation passing.
The Government confirmed that the previously legislated tax cuts continue to roll out. From 1 July 2026, the second marginal tax rate (applied to taxable income between $18,201 and $45,000) drops from 16% to 15%. A further cut is scheduled for 1 July 2027.
For 2025-26 the rates are:
From 1 July 2026 (subject to the previously legislated change taking effect):
The 2% Medicare levy continues to apply on top of these rates.
For employers, the rate change has direct operational implications:
The cumulative effect across three rounds of tax cuts (the legislated rounds for 2024, 2026, and 2027), combined with the new $1,000 instant deduction and the $250 Working Australians Tax Offset described below, is up to $2,816 of combined annual benefit for an Australian worker on average earnings by 2027-28 (compared to 2023-24 settings), according to Treasury modelling published with the Budget.
For employers, this matters mostly because employees may ask questions about why their take-home pay has changed in their first pay run after 1 July 2026. The simple answer is that the legislated tax cuts are taking effect.
For broader payroll setup context, see our Xero payroll Australia complete setup guide and the hiring first employee compliance guide.
The Government announced a new $1,000 "instant tax deduction" for work-related expenses, starting from the 2026-27 income year. The deduction:
The deduction is claimed by the employee at tax time, not by the employer through payroll.
The instant deduction is an employee-facing measure, not an employer-facing one. The deduction reduces the employee's taxable income at tax time, increasing their refund or reducing their bill.
However, the measure has indirect implications for employers:
For employers, the change does not directly affect PAYG withholding or payroll mechanics. It does change the after-tax conversation with employees, particularly around expenses that are currently reimbursed or salary-packaged.
The detail (what counts as "work-related expense", what records are needed, what happens to claims above $1,000) is being designed through Treasury consultation.
The Government announced a new permanent tax offset called the Working Australians Tax Offset (WATO):
The WATO sits alongside the existing Low Income Tax Offset (LITO). For workers eligible for both, the WATO effectively raises the tax-free threshold by close to $1,800 (or up to $4,985 for workers eligible for the maximum LITO).
The WATO is an offset applied at the end of the income year, not through PAYG withholding. The mechanics:
For employers:
The WATO is one of several measures contributing to the combined $2,816 of annual tax benefit for an average earner by 2027-28 (compared to 2023-24 settings).
The Government announced an increase of 2.9% to the Medicare levy low-income thresholds, applying from the 2025-26 income year. The increase provides tax relief for over one million low-income individuals, families, seniors, and pensioners by raising the income point at which the Medicare levy starts to apply.
The Medicare levy itself remains 2% of taxable income for most taxpayers. The threshold increase affects the point at which low-income earners start paying the levy and the rate at which it phases in.
For most employers, the threshold change does not affect PAYG withholding mechanics. The Medicare levy is calculated and applied at the individual's tax return level, with PAYG withholding factoring it in for employees above the threshold.
The change is most relevant for:
Most payroll software handles this automatically through the annual update to withholding schedules.
The Budget brings together three layers of tax change affecting workers:
Treasury modelling published with the Budget gives a combined benefit of up to $2,816 per year by 2027-28 for an Australian worker on average earnings, compared to 2023-24 settings.
In practice:
For employers running compensation planning or salary review conversations, the practical takeaway is that real take-home pay is rising across the income distribution between 2024 and 2028, driven by these measures plus the previously legislated tax cuts.
This is relevant context for employers thinking about wage growth expectations, retention conversations, and the cost of living narrative that has dominated employer-employee conversations for the past several years.
The Government announced changes to the permanent migration points test, prioritising younger and more educated workers. The change affects around two-thirds of permanent migrants.
The detail of the points test changes is being designed through Home Affairs consultation. The Budget announcement is a direction rather than a final framework.
For employers in industries that rely on skilled migration (technology, engineering, healthcare, construction, hospitality, agriculture), the points test changes affect the visa pathway for current and prospective international hires.
If legislated:
For employers running skilled migration through registered migration agents, the agents will publish detailed analysis once the design is clearer. For most small business employers, the change is unlikely to have an immediate operational impact but is worth monitoring for staff who may be affected.
Payday Super takes effect from 1 July 2026 under legislation that pre-dates the 2026-27 Budget. The Budget reinforces the start date but does not change the mechanics.
Under Payday Super:
Payday Super is the most operationally significant payroll change in 2026 for Australian employers. It requires:
For more detail, see our Payday Super 2026 employer guide and the hiring first employee compliance guide. The Budget does not change anything about Payday Super; it confirms the timeline.
A reasonable preparation list for the new financial year, based on the announcements:
Payroll software
Employee communications
Expense and salary packaging review
Migration
Wage Compliance Code
None of these are tax decisions. They are operational preparation. The actual tax outcomes for individual employees are between the employee and their tax agent.
Some things worth noting that did not appear in the Budget:
These absences are worth noting because some were rumoured in pre-Budget commentary and would have had significant payroll and HR implications if announced.
Most of the Budget tax measures need to pass Parliament before they take effect. The likely path:
For employers, the practical takeaway is to monitor payroll software updates around June 2026, confirm your provider has the new rates and thresholds ready, and prepare for employee questions about the changes. Most of the operational lift is on the payroll software, not on you.
When does the new 15% tax rate take effect?
The legislated change from 16% to 15% for taxable income between $18,201 and $45,000 takes effect from 1 July 2026. The change has already been legislated under previous tax cut legislation. Payroll software providers will update PAYG withholding tables for the new rate before or on 1 July 2026.
Do I need to do anything in payroll for the new tax rates?
For employers using mainstream payroll software (Xero, MYOB, Employment Hero, KeyPay, Reckon, ADP), the withholding table update is automatic. For employers using manual payroll or older systems, you need to download the updated PAYG withholding schedules from the ATO website once they are published, typically in May or June of each year.
What is the $1,000 instant tax deduction and how does it work?
The $1,000 instant tax deduction is an announced measure that would allow workers to claim up to $1,000 of work-related expenses without keeping receipts, from the 2026-27 income year. The deduction is claimed by the employee on their tax return, not through payroll. The detail (what qualifies, how it interacts with itemised claims above $1,000) is being designed through Treasury consultation. The measure requires legislation to take effect.
What is the Working Australians Tax Offset (WATO)?
The WATO is an announced new permanent tax offset of up to $250 per year for eligible workers. It applies to income earned from work and starts from the 2027-28 income year. Workers would see the benefit when they lodge their tax return after 30 June 2028. The measure requires legislation.
Do employers need to factor the $1,000 instant deduction into payroll?
No. The $1,000 deduction is claimed by the employee at tax time, not applied through PAYG withholding. PAYG withholding is calculated based on the standard tax rates and the employee's declared circumstances. The deduction changes the employee's tax outcome at year-end, not their fortnightly take-home pay.
Did the Budget change the super guarantee rate?
No. The super guarantee rate that started 1 July 2025 of 12% remains. Payday Super starts 1 July 2026 as previously legislated, requiring super to be paid within 7 business days of each pay run. The Budget did not change either of these.
Did the Budget change minimum wages or award rates?
No. Minimum wages and Modern Award rates are set by the Fair Work Commission through the Annual Wage Review each year, separately from the Budget. The 2026 Annual Wage Review decision is expected in June 2026 and will take effect from the first full pay period on or after 1 July 2026.
What does the Budget mean for my international staff on skilled work visas?
The Government announced changes to the permanent migration points test that will affect around two-thirds of permanent migrants. Employer-sponsored visa pathways are separate and not directly affected. Employees on skilled work visas considering permanent residency should consult a registered migration agent. The detailed design is being consulted on through Home Affairs.
What should I tell my employees about the Budget?
The simplest position is to confirm that legislated tax cuts continue to flow through (the 1 July 2026 rate change is the next one), confirm that announced measures still need to pass Parliament, and direct employees to their tax agent or the ATO for advice on their specific tax outcome. Employers should generally avoid giving tax advice to employees.
Where can I get the updated PAYG withholding tables?
The ATO publishes updated PAYG withholding schedules each year before 1 July, available on the ATO website. For mainstream payroll software users, the update flows automatically. For manual payroll, download the new schedules from ato.gov.au and apply them from the first pay run on or after 1 July 2026.
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Disclaimer: This article summarises announcements made in the 2026-27 Federal Budget, handed down on 12 May 2026. Tax rate changes and PAYG withholding require legislation to take effect, and details of newer measures (the $1,000 instant deduction, the WATO, the migration points test) are still being designed through Treasury and Home Affairs consultation. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, legal, or migration advice. For advice on how any specific measure might apply to an individual or business, consult a registered tax agent, accountant, or migration agent as appropriate.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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