Australia's personal income tax system changed meaningfully on 1 July 2024 when the Stage 3 tax cuts took effect, lowering rates and expanding thresholds for most Australian taxpayers. The second phase landed on 1 July 2026: the rate on income between $18,201 and $45,000 dropped from 16% to 15%. A further reduction to 14% is already legislated for 1 July 2027.
For business owners, understanding the current brackets matters for two reasons: calculating PAYG withholding correctly for employees, and understanding your own tax liability as a sole trader, partner, or company director. Getting PAYG withholding wrong creates problems for your employees at tax time and can attract ATO penalties.
This guide covers the current 2026-27 rates for residents and non-residents, the Medicare levy, the remaining tax offsets, worked examples at common income levels, and what changes from July 2027.
Published: July 2026
Australian tax residents pay income tax on their worldwide income. The tax-free threshold means the first $18,200 of taxable income is not taxed. Rates are progressive - only the income within each bracket is taxed at that rate, not the total income.
For the 2026-27 financial year (1 July 2026 to 30 June 2027):
$0 to $18,200: Nil (tax-free threshold)
$18,201 to $45,000: 15 cents per dollar
$45,001 to $135,000: 30 cents per dollar
$135,001 to $190,000: 37 cents per dollar
Above $190,000: 45 cents per dollar
These rates exclude the Medicare levy of 2%, which is calculated separately. They also exclude tax offsets, which reduce the final tax payable.
The only change from 2025-26 is the second bracket dropping from 16% to 15%, legislated under the Treasury Laws Amendment (More Cost of Living Relief) Act 2025. The ATO updated all PAYG withholding schedules to reflect the new rate from the first pay period starting on or after 1 July 2026, so the change flows through payroll automatically.
Example 1: Employee earning $55,000
A Sydney retail employee earns $55,000 in taxable income in 2026-27.
Tax calculation:
Medicare levy (2% of $55,000): $1,100
Low Income Tax Offset: partial, approximately $175 at this income (the full $700 applies up to $37,500 and phases out completely at $66,667)
Total tax and levy payable after LITO: approximately $7,945
As an employer, your PAYG withholding across the year should approximate this figure. Xero and MYOB calculate this using ATO tax tables automatically, but the underlying rates are what drive the calculation.
Example 2: Sole trader earning $95,000
A Melbourne consultant operating as a sole trader has $95,000 in taxable income after deductions.
Tax calculation:
Medicare levy (2% of $95,000): $1,900
Total: approximately $20,920 before any applicable offsets
As a sole trader, you pay tax on business profit at individual rates. This means your effective tax rate and cashflow planning need to account for both income tax and the Medicare levy. Many sole traders use PAYG instalments to spread this liability across the year rather than facing a large bill at tax time. Our guide on PAYG instalments Australia explains how this works.
Example 3: Higher income earner at $200,000
A company director receiving a $200,000 salary.
Tax calculation:
Medicare levy (2% of $200,000): $4,000
Medicare Levy Surcharge: applies if no eligible private hospital cover. Singles earning above $105,000 (2026-27 threshold) pay an additional 1% to 1.5%.
Total before surcharge: approximately $59,870
Non-residents are taxed only on Australian-sourced income and do not receive the tax-free threshold or the Low Income Tax Offset.
For 2026-27:
$0 to $135,000: 30 cents per dollar
$135,001 to $190,000: 37 cents per dollar
Above $190,000: 45 cents per dollar
Note that the first non-resident rate has been 30% (not the old 32.5%) since the Stage 3 changes took effect on 1 July 2024. The 2026-27 resident rate cut does not change non-resident rates, because non-residents never had the $18,201 to $45,000 bracket.
Non-residents generally do not pay the Medicare levy as they are not entitled to Medicare benefits, though this depends on their specific circumstances.
For employers with non-resident employees or contractors, applying the wrong withholding rate is a common payroll compliance error. A non-resident employee earning $70,000 should have 30% withheld on their entire income - not the resident rate with the tax-free threshold applied. The ATO's tax withheld calculator specifies the correct withholding for different residency categories.
Working holiday makers (visa subclasses 417 and 462) have a separate rate of 15% on the first $45,000, then the standard rate scale applies above that. If you employ backpackers or working holiday makers, make sure your payroll system is applying the correct withholding category.
The Medicare levy is 2% of taxable income for most Australian residents, on top of the income tax rates above. It funds the public health system.
Low-income earners are exempt or pay a reduced levy. No levy is payable below $28,011 for singles (the 2025-26 threshold, indexed annually through the federal budget), with a reduced levy phasing in above that. Families have higher thresholds, increasing for each dependent child.
The Medicare Levy Surcharge is an additional charge (1% to 1.5%) for higher earners without eligible private hospital cover. For 2026-27 it applies to singles earning above $105,000 and families above $210,000, with the family threshold increasing by $1,500 for each dependent child after the first. For employees in these income ranges without private cover, the surcharge increases their total tax burden and affects PAYG withholding if they complete the correct Medicare levy variation declaration.
Employees can reduce PAYG withholding if they're eligible for an exemption or reduction by completing an ATO Medicare levy variation declaration and providing it to you as their employer.
Tax offsets reduce the income tax payable after the bracket calculation. They do not reduce the Medicare levy.
Low Income Tax Offset (LITO)
The LITO provides up to $700 in tax reduction for resident individuals. It applies in full for taxable incomes up to $37,500, then phases out and disappears entirely at $66,667. For employees, Xero and MYOB factor LITO into the PAYG withholding calculation automatically.
Seniors and Pensioners Tax Offset (SAPTO)
Available to eligible older Australians meeting age and residency criteria. For 2026-27, the maximum offset is $2,230 for eligible singles, shading out from a rebate income of $36,034 and cutting out entirely at $53,874. Relevant if you employ or engage eligible senior workers who may need to adjust their withholding declarations.
Important: LMITO has ended
The Low and Middle Income Tax Offset expired after the 2022-23 financial year. It is no longer available. If your employees are asking why their tax refund is smaller than in the early 2020s, the end of LMITO is often the reason - they received up to $1,500 in offset in prior years that no longer applies.
Two changes matter for the 2026-27 year.
First, the rate cut. The 16% rate on income between $18,201 and $45,000 reduced to 15% from 1 July 2026. The thresholds remain the same; the change is only to the rate applied to the lowest taxable bracket. Your payroll software should have updated its PAYG tables automatically at the start of the financial year. The saving is worth up to $268 per year for anyone earning $45,000 or more, delivered gradually through slightly lower withholding each pay.
Second, a new $1,000 instant deduction for work-related expenses applies from the 2026-27 income year. Employees with labour income can claim a standard $1,000 deduction without receipts, or claim more with records. This doesn't change your PAYG withholding obligations, but expect questions from employees at tax time.
The third phase of the legislated cuts reduces the 15% rate to 14% from 1 July 2027. That's worth a further $268 per year for most workers, taking the combined benefit of the two cuts to around $536 a year compared with the 2025-26 rates.
For business planning purposes, these are modest changes - not the structural shift the Stage 3 cuts represented - but worth noting for salary planning and cashflow modelling.
PAYG withholding accuracy
Your payroll software should be applying the correct 2026-27 rates automatically if it's been updated since 1 July 2026. If you run payroll manually or through an older system, verify the withholding tables are current. Incorrect withholding that results in employees underpaying tax during the year creates problems at tax time and can attract ATO attention.
Check that employee Tax File Number declarations are on file and up to date - the withholding rate depends on whether employees have claimed the tax-free threshold, their residency status, and any Medicare levy variation declarations.
Sole trader and partnership tax planning
If your business operates as a sole trader or partnership, profit is taxed at individual rates through your personal tax return. Unlike a company structure where the 25% small business company tax rate applies, individual rates can be higher depending on your total income. Understanding which bracket your business profit is likely to land you in helps you plan for your tax liability and decide whether quarterly PAYG instalments make sense.
Company tax rates
The above brackets apply to individuals only. A company is taxed at either 25% (base rate entity - broadly, companies with aggregated turnover under $50 million that derive most income from active business sources) or 30%. Company tax rates have not changed for 2026-27. See our guide on company structure vs sole trader in Australia for how these structures compare.
Salary planning and hiring
Understanding the bracket thresholds helps when structuring employee packages. A salary of $135,000 keeps an employee in the 30% bracket. At $135,001 the marginal rate on each additional dollar jumps to 37%. For senior hires where salary is negotiable, the bracket thresholds can inform the conversation about base salary versus superannuation, bonuses, or non-cash benefits.
For employment cost calculations including super, payroll tax, and leave loading on any salary level, our employee cost calculator models the full loaded cost. Our guide on the actual cost of hiring in Australia covers the full picture.
Applying resident rates to non-resident employees
Using the resident brackets and tax-free threshold for a non-resident employee results in significant under-withholding. The ATO holds employers responsible for correct withholding and will pursue the shortfall.
Not updating payroll systems after rate changes
The 16% to 15% change took effect on 1 July 2026. Any business running stale tax tables is over-withholding from every employee earning above $18,200. Verify your payroll system updated at the start of the financial year, and confirm it's set to update automatically again when the 14% rate lands on 1 July 2027.
Claiming LMITO that no longer exists
Some employees still ask about the LMITO because they remember receiving it in prior years. It ended after 2022-23. Applying it in 2026-27 would result in under-withholding.
Missing Medicare levy variation declarations
Employees with specific circumstances (low income, eligible for exemption, or affected by the surcharge) can lodge a Medicare levy variation declaration with their employer to adjust withholding. If you're not collecting these where relevant, some employees will face unexpected bills or over-payments at tax time.
Withholding on multiple jobs
Employees with multiple jobs should only claim the tax-free threshold from one employer. If both employers apply the threshold, the employee will be under-withheld for the year and face a tax bill when they lodge. Remind new employees starting a second job with you to check their TFN declaration.
What are the income tax brackets for Australian residents in 2026-27?
The 2026-27 brackets are: nil on the first $18,200, 15% on $18,201 to $45,000, 30% on $45,001 to $135,000, 37% on $135,001 to $190,000, and 45% on income above $190,000. These exclude the 2% Medicare levy, which is calculated on top. The only change from 2025-26 is the second bracket rate dropping from 16% to 15%.
How are tax brackets different for non-residents?
Non-residents don't receive the tax-free threshold. The 2026-27 non-resident rates are 30% on $0 to $135,000, 37% on $135,001 to $190,000, and 45% above $190,000. Non-residents generally don't pay the Medicare levy. Applying the wrong rates to non-resident employees is a common payroll error.
Is the Low and Middle Income Tax Offset still available?
No. The LMITO ended after the 2022-23 financial year. The Low Income Tax Offset (LITO) remains, providing up to $700 for taxable incomes up to $66,667.
What tax rate does a company pay in Australia?
Companies pay either 25% (base rate entities with aggregated turnover under $50 million deriving most income from active business) or 30%. Company tax rates are separate from individual income tax brackets and have not changed for 2026-27.
When do Australian tax rates change next?
From 1 July 2027, the 15% rate on income between $18,201 and $45,000 reduces to 14%. This change is already legislated. All other brackets and thresholds remain unchanged.
How do I make sure my PAYG withholding is correct?
Use ATO-compliant payroll software (Xero, MYOB) with updated tax tables, collect current TFN declarations and Medicare levy variation declarations from all employees, apply non-resident rates where applicable, and verify your payroll software updates automatically when rates change. The ATO's tax withheld calculator is useful for spot-checking individual withholding amounts.
What is the Medicare Levy Surcharge and who pays it?
The Medicare Levy Surcharge is an additional 1% to 1.5% levy for Australian residents without eligible private hospital cover who earn above the surcharge thresholds - singles above $105,000 and families above $210,000 for 2026-27. It is charged on top of the standard 2% Medicare levy. Affected employees can adjust their PAYG withholding by submitting a Medicare levy variation declaration to their employer.
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We review and check this guide periodically. At the time of writing (July 2026), all information was current. Tax rates and thresholds are for the 2026-27 financial year as published by the ATO. 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, or legal advice. Please consult a qualified professional for advice specific to your situation.
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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