Published: March 2026 (updated from October 2025)
Australia's income tax system is progressive - higher income is taxed at higher rates. But the first portion of income is not taxed at all. This is the tax-free threshold: the amount an Australian resident can earn before paying any income tax.
For 2025-26, the tax-free threshold is $18,200. It applies automatically through the PAYG withholding system when an employee claims it on their Tax File Number (TFN) declaration, and through the annual tax return when it wasn't claimed during the year.
For employers, understanding how the threshold works is important for correct PAYG withholding calculations. For employees with multiple jobs, getting it wrong creates tax debt that only becomes visible at year end.
The $18,200 threshold means that no income tax is payable on the first $18,200 of taxable income for Australian resident individuals. Income above that amount is taxed at the applicable bracket rates.
The 2025-26 resident tax rates, excluding the Medicare levy, are:
$0 to $18,200: Nil
$18,201 to $45,000: 16%
$45,001 to $135,000: 30%
$135,001 to $190,000: 37%
Above $190,000: 45%
So an employee earning $50,000 does not pay 30% on the full $50,000. They pay nothing on the first $18,200, 16% on the next $26,800 ($4,288), and 30% on the remaining $5,000 ($1,500) - a total of $5,788 in income tax before the Medicare levy and any applicable offsets.
The practical effect is significant. Without the threshold, that same employee on $50,000 would owe $14,500 more in tax. See our Australian tax brackets guide for full bracket calculations across common income levels.
The Low Income Tax Offset (LITO) extends the effective tax-free amount beyond $18,200. LITO provides up to $700 in tax reduction for resident individuals with taxable incomes up to $37,500, tapering out to zero at $66,667.
The practical result: because of LITO, an individual earning around $22,575 effectively pays no income tax, even though their income is above the $18,200 threshold. The $700 offset covers the tax that would otherwise be owed on income between $18,200 and $22,575.
LITO is applied automatically through PAYG withholding and in the annual tax return. It does not need to be separately claimed.
The Low and Middle Income Tax Offset (LMITO) that previously provided up to $1,500 ended after the 2022-23 financial year. It no longer applies.
Full-year Australian tax residents
If you are an Australian tax resident for the entire financial year (1 July to 30 June), you are entitled to the full $18,200 threshold. Tax residency for Australian purposes is based on the ATO's residency tests - it is not the same as citizenship or visa type. Most people living and working permanently in Australia meet the residency tests.
Part-year residents
If you became or ceased to be an Australian tax resident during the financial year, your tax-free threshold is reduced proportionally. The formula is:
$13,464 plus ($4,736 divided by 12, multiplied by the number of months you were an Australian resident during the year).
For example, if you arrived in Australia on 1 January and became a resident from that date, you were a resident for six months of the financial year. Your threshold would be $13,464 plus ($4,736 divided by 12, multiplied by 6) = $13,464 plus $2,368 = $15,832.
Non-residents
Non-residents for tax purposes do not receive the tax-free threshold. They are taxed at 32.5% from the first dollar of Australian-sourced income, then at higher rates for income above $135,000. Non-residents also generally do not pay the Medicare levy.
People under 18
Individuals under 18 can claim the tax-free threshold on earned income (wages, salary) at the same $18,200 level. However, unearned income (dividends, interest, trust distributions) received by minors is taxed at penalty rates under the ATO's minor tax rules, not at regular resident rates.
Students and casual workers
Students and casual workers who are Australian tax residents can claim the tax-free threshold. If their total income for the year is under $18,200 and they have no other lodgement obligations, they generally don't need to lodge a tax return - though lodging may still be beneficial if tax was withheld during the year and a refund is owed.
Through a TFN declaration form
When starting a new job, employees complete a Tax File Number (TFN) declaration and indicate whether they are claiming the tax-free threshold. If they tick yes, the employer uses withholding tables that factor in the threshold, resulting in less tax withheld from each pay.
If an employee does not claim the threshold on their TFN declaration, the employer withholds tax as if the threshold does not apply, resulting in more tax withheld. The employee then claims a refund when lodging their annual tax return.
Through the annual tax return
If the threshold was not claimed during the year, the ATO applies it when processing the tax return and issues a refund of any excess tax withheld.
Changing your claim during the year
If your circumstances change - for example, you get a second job and realise you've been claiming the threshold from the wrong employer - you can submit a new TFN declaration to update your withholding. The annual return reconciles the full year regardless.
The tax-free threshold can only be claimed from one employer at a time. If you have two jobs and claim the threshold from both, each employer will withhold tax as if you have $18,200 of tax-free income, when in reality you are only entitled to one threshold for the year.
The result: by the time you lodge your tax return, the ATO calculates your total income from all sources and determines that you owe more tax than was withheld. What feels like a refund situation becomes a tax bill.
The correct approach is to claim the threshold from the employer who pays you the most (your primary job), and let the secondary employer withhold tax from the first dollar. This typically results in more tax being withheld from the secondary job than if the threshold were claimed -- but it produces the correct annual outcome.
For employers, this is worth raising with new employees who indicate they already have another job, to prevent them from making the mistake unknowingly.
For employers running payroll, the TFN declaration determines which withholding scale applies to each employee. Xero and MYOB handle this automatically based on whether the employee has indicated they are claiming the threshold.
The withholding difference is material. For an employee earning $50,000 annually:
If an employee changes from claiming to not claiming (because they've started a second job), they need to submit a new TFN declaration. As an employer, you should update the withholding calculation from the next pay period.
For more on PAYG withholding in the context of employment, see our guide on what is PAYG withholding and our weekly, fortnightly, and monthly tax tables guide.
The tax-free threshold applies to taxable income from employment and business income, but there are important exclusions worth knowing:
Superannuation contributions tax: The tax-free threshold has no effect on the 15% contributions tax applied to concessional (pre-tax) super contributions. Super is taxed within the fund regardless of your personal income.
Capital gains: Capital gains are included in taxable income and benefit from the threshold, but they are calculated separately and may have different tax treatment depending on whether the asset was held for more than 12 months.
Medicare levy: The threshold exempts income from income tax, not from the Medicare levy. The Medicare levy has its own low-income exemption threshold - for 2025-26 approximately $26,000 for singles -- below which no levy is payable. Between the Medicare levy threshold and the income tax threshold, only the levy applies, not income tax.
Foreign income: Australian tax residents are taxed on worldwide income, so foreign income is included in taxable income and subject to the same thresholds and rates, though foreign tax credits may apply.
Sophie is a part-time retail worker and Australian tax resident earning $21,000 in 2025-26. She has one job and has claimed the tax-free threshold.
Her income tax calculation:
LITO reduces her income tax further. At $21,000, LITO applies at the full $700, which more than covers the $448 owed. Her income tax liability after LITO is nil.
Medicare levy: Sophie earns above the $26,000 Medicare levy threshold? No - at $21,000 she is below it, so no levy applies.
Result: Sophie has no income tax or Medicare levy liability for the year. If her employer withheld any tax during the year (which they shouldn't have if the withholding tables were applied correctly with the threshold claimed), she would receive a full refund.
What is the tax-free threshold for 2025-26?
$18,200 for full-year Australian tax residents. Combined with the Low Income Tax Offset, individuals earning up to approximately $22,575 effectively pay no income tax before the Medicare levy.
Does the tax-free threshold change each year?
It has been $18,200 since 2012-13 and has not changed for the 2025-26 year. The tax brackets above it have changed -- most recently with the Stage 3 cuts that took effect from 1 July 2024, which reduced the rate on income from $18,201 to $45,000 from 19% to 16%.
What happens if I don't claim the tax-free threshold at my job?
Your employer withholds more tax each pay period. You get a larger refund when you lodge your annual tax return. It's not a penalty -- it just means you're overpaying throughout the year and reconciling at year end. Some employees prefer this as a form of forced saving.
Can I claim the tax-free threshold from two jobs?
No. You can only claim the threshold from one employer at a time. Claiming it from two jobs results in under-withholding and a tax debt at the end of the year. Claim it from your primary (highest-paying) employer only.
Does the tax-free threshold apply to foreign residents?
No. Foreign residents for tax purposes are taxed at 32.5% from the first dollar of Australian-sourced income. They do not receive the threshold and generally do not pay the Medicare levy.
Do I need to lodge a tax return if my income is under $18,200?
Not necessarily, but you may want to. If your income is under $18,200 and no tax was withheld, you generally do not need to lodge. If tax was withheld (for example, because you didn't claim the threshold at your employer), you should lodge to get the refund. The ATO's website has a lodgement obligation tool to check your specific situation.
How does the threshold interact with the Medicare levy?
They are separate. The tax-free threshold exempts the first $18,200 from income tax. The Medicare levy has its own lower threshold (approximately $26,000 for singles in 2025-26) below which it does not apply. Between $18,200 and $26,000, income tax does not apply but the Medicare levy does -- though for most people, LITO eliminates the income tax in this range anyway.
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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. Nothing in this article constitutes financial or tax 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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