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. Those same rates apply in 2025-26. A further reduction is already legislated for 1 July 2026.
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 2025-26 rates for residents and non-residents, the Medicare levy, the remaining tax offsets, worked examples at common income levels, and what changes from 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 2025-26 financial year (1 July 2025 to 30 June 2026):
$0 to $18,200: Nil (tax-free threshold)
$18,201 to $45,000: 16 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.
These rates apply for the full 2024-25 and 2025-26 financial years - the government confirmed in the May 2025 budget that the same brackets apply for both years, so there are no changes mid-year.
Example 1: Employee earning $55,000
A Sydney retail employee earns $55,000 in taxable income in 2025-26.
Tax calculation:
Medicare levy (2% of $55,000): $1,100
Low Income Tax Offset: not applicable above $37,500 at maximum rate, phased out by $66,667
Total tax and levy payable before any remaining offsets: approximately $8,388
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 $21,188 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 $101,000 pay an additional 1% to 1.5%.
Total before surcharge: approximately $60,138
Non-residents are taxed only on Australian-sourced income and do not receive the tax-free threshold or the Low Income Tax Offset.
For 2025-26:
$0 to $135,000: 32.5 cents per dollar
$135,001 to $190,000: 37 cents per dollar
Above $190,000: 45 cents per dollar
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 32.5% 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 non-resident 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. For 2025-26 the thresholds are updated annually - the full levy applies above approximately $26,000 for individuals, with reductions below 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. It applies to singles earning above $101,000 and families above $202,000. 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. Effectively extends the tax-free threshold to approximately $32,615 for eligible singles in 2025-26. 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 in 2024-25 or 2025-26. The original version of this article incorrectly referred to it as available until 2024-25. If your employees are asking why their tax refund is smaller than expected, the end of LMITO is often the reason - they received up to $1,500 in offset in prior years that no longer applies.
The government legislated further rate reductions in the 2025-26 budget. From 1 July 2026, the 16% rate on income between $18,201 and $45,000 reduces to 15%. From 1 July 2027, it reduces further to 14%.
The thresholds remain the same. The change is only to the rate applied to the lowest taxable bracket.
For employers, your payroll software will update its PAYG tables when the new rates take effect. The practical impact per employee varies but for someone earning $45,000 the tax saving is approximately $270 per year compared to the current 16% rate.
For business planning purposes, this is a modest change - 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 2025-26 rates automatically if it's been updated since 1 July 2025. 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 2025-26. 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 Stage 3 rates that took effect 1 July 2024 were a significant change. Any business that didn't update their payroll tables at the start of the 2024-25 year was using incorrect withholding rates for the entire year. With the further change from 16% to 15% coming on 1 July 2026, verify your payroll system is set to update automatically.
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 2025-26 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 2025-26?
The 2025-26 brackets are: nil on the first $18,200, 16% 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 same rates applied in 2024-25.
How are tax brackets different for non-residents?
Non-residents don't receive the tax-free threshold. The 2025-26 non-resident rates are 32.5% 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. It is not available in 2024-25 or 2025-26. 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 2025-26.
When do Australian tax rates change next?
From 1 July 2026, the 16% rate on income between $18,201 and $45,000 reduces to 15%. From 1 July 2027 it reduces to 14%. These changes are 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 $101,000 and families above $202,000 (2025-26 approximate thresholds). 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 articles periodically. Tax rates and thresholds are sourced from the ATO and are current as at March 2026 for the 2025-26 financial year. Tax rules can change and individual circumstances vary. Nothing in this article constitutes financial or tax advice. Please consult a qualified professional for advice specific to your situation.
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