Australian tax brackets explained: PAYG obligations and taxpayer rates

Published 13 July 2026

Table of contents

• What is a tax bracket?
• How to apply marginal tax rates in Australia
• Who uses different taxpayer brackets?
• How tax thresholds and offsets change what you pay
• How pay as you go (PAYG) works for employees and sole traders
• Get started with Xero
• FAQs on tax brackets and PAYG

Key takeaways

• Australia uses marginal tax brackets, so only the income within each band is taxed at that band’s rate.
• The tax-free threshold, the Medicare levy and offsets such as the low income tax offset can change the final tax you pay.
• PAYG connects tax brackets to everyday practice, as employers withhold tax from wages and sole traders can pay instalments during the year.
• The lowest tax bracket rate dropped from 16% to 15% on 1 July 2026, with a further cut to 14% from 1 July 2027.

What is a tax bracket?

A tax bracket is a range of income that is taxed at a specific rate. In Australia, income tax is progressive: the more an employee earns, the higher the tax rate that applies to the next portion of their income.

What are the tax brackets in Australia?

The tax brackets in Australia are set by the Australian Taxation Office (ATO) and presented in a tax table. The current tax brackets for Australian residents, applying to the 2026–27 financial year, are:

As of 1 July 2026, the lowest bracket rate has dropped from 16% to 15% for the 2026-27 financial year. A further cut to 14% is legislated to take effect from 1 July 2027.

For small businesses and payroll administrators, you'll use tax brackets to work out how much tax to withhold from wages under the pay as you go (PAYG) system.

For sole traders, these tax brackets apply to the profit you make from your business. The business income is treated as your personal income and taxed at the individual rates.

How to apply marginal tax rates in Australia

A marginal tax rate is the rate applied to each additional dollar earned within a bracket, so tax rises gradually as income grows.

For example, an employee earning $80,000 per year would be taxed the following amounts:

• First $18,200 tax-free
• Next $26,800 at 15% = $4,020
• Remaining $35,000 at 30% = $10,500
• Total = $14,520 (a $268 saving compared to 2025-26 rates)

In your payroll software, a PAYG withholding table reflects these marginal rates. When you enter an employee's gross pay and tax file number (TFN) declaration details, the system calculates withholding based on those marginal rates.

As an employer, you'll need to withhold the correct amount and remit it to the ATO.

Who uses different taxpayer brackets?

Different taxpayer brackets apply depending on the employee's residency and circumstances. To calculate employee income tax, you can use the ATO's tax withheld calculator.

Australian residents for tax purposes

Most employees and business owners who live and work in Australia are residents for tax purposes. They use the standard resident tax rates and generally receive the tax-free threshold.

Foreign residents

Foreign residents for tax purposes are taxed differently. They don't receive the tax-free threshold that residents do, and they pay higher rates from the first dollar earned in Australia:

Working holiday makers

Working holiday makers have specific rates that apply to income earned in Australia under their visa conditions.

Use the ATO's withholding lookup tool to calculate income tax within the updated working holiday maker tax brackets.

Sole traders

Sole traders are taxed as individuals. The business income forms part of their personal income and is taxed at individual tax rates.

For small business owners, this means your business profit is added to any other income you earn, and the total determines your tax bracket.

How tax thresholds and offsets change what you pay

Tax thresholds, the Medicare levy, and other offsets can change the final amount of tax payable. Understanding how these elements affect withholding and reporting helps you stay compliant with Australia's tax laws and avoid under- or over-withholding from employee wages.

Tax-free threshold

The tax-free threshold lets eligible taxpayers earn up to a set amount before income tax applies. For employees who are Australian residents, the tax-free threshold in 2026 is $18,200.

Employees usually claim this on their TFN declaration form when starting a job. If they claim it, PAYG withholding is lower across the year. If they don't claim it, more tax is withheld from each pay.

Medicare levy

Most Australian residents pay the Medicare levy, which helps fund the public health system. It's generally calculated at 2% of taxable income, subject to income thresholds.

Low-income earners may pay a reduced Medicare levy or none at all, depending on where their income sits against the ATO thresholds.

You don't need to calculate the Medicare levy separately. When you apply the correct PAYG withholding amount based on the employee's earnings and TFN declaration, the levy is factored in automatically.

At the end of the financial year, the ATO calculates the employee's final income tax and Medicare levy liability together. Any difference between the amount withheld during the year and the final assessment is refunded or payable at that point.

Tax offsets

A tax offset reduces the amount of income tax an employee pays after the tax brackets have been applied, without changing their taxable income.

The Low Income Tax Offset (LITO) reduces the tax payable for lower and lower-middle income earners. It's income tested, so the offset reduces as income increases.

The Seniors and Pensioners Tax Offset (SAPTO) is available to older Australians and some people who receive a pension. It can raise the effective tax-free threshold for eligible employees, so they pay less income tax overall.

The ATO reconciles offsets when the employee lodges their tax return, so you don't need to calculate most personal tax offsets during the year. Any offsets applied may mean the amount withheld through PAYG doesn't exactly match the employee's final tax outcome.

How pay as you go (PAYG) works for employees and sole traders

Pay as you go (PAYG) is the system the ATO uses to collect income tax progressively during the year.

There are two main PAYG systems relevant to small businesses:

• PAYG withholding
• PAYG instalments

PAYG withholding for employers

PAYG withholding is the tax you hold back from employee wages and pay to the ATO on their behalf. If you have employees, you must:

• register for PAYG withholding with the ATO
• withhold tax from employee wages using the relevant taxable income table
• report and pay withheld amounts to the ATO, usually through your business activity statement

You calculate withholding based on:

• gross wages
• whether the employee claims the tax-free threshold
• the pay cycle, such as weekly or monthly

Using compliant payroll software reduces the risk of errors and keeps you aligned with current tax tables.

PAYG instalments for sole traders

PAYG instalments are regular prepayments sole traders and some companies make towards their own expected tax bill. Instead of waiting until the end of the financial year, the ATO estimates tax based on prior returns, and you pay instalments quarterly or monthly.

When you file your tax return, the ATO credits the total instalments paid against your income tax due.

For small business owners, this can improve cash flow by spreading tax payments across the year rather than facing a large bill at once.

Get started with Xero

Managing tax brackets and PAYG manually can be time consuming. Xero's payroll software automates much of the process.

Xero supports Australian small businesses with:

• Single Touch Payroll reporting
• automatic updates to ATO tax tables
• built-in PAYG withholding calculations
• real-time visibility of wages, superannuation, and tax liabilities
• forecasting tools to estimate cash flow and tax obligations

When you enter employee details correctly and keep accurate records, the system calculates withholding based on current marginal rates and tax thresholds.

For sole traders, Xero can also track profit, generate activity statements, and help estimate PAYG instalments, reducing manual calculations and supporting compliance with ATO regulations.

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FAQs on tax brackets and PAYG

Get answers to common questions from small business owners and payroll administrators about tax brackets and PAYG.

What are the ATO income tax brackets?

The ATO sets income tax brackets for Australian residents each financial year, defining income ranges and the rate that applies to each range. On 1 July 2026, the lowest bracket rate dropped from 16% to 15%.

What tax bracket applies at $100,000?

An employee earning $100,000 pays $20,520 in income tax under the 2026-27 rates: $0 on the first $18,200, $4,020 on income to $45,000, and $16,500 on the remaining $55,000. This is $268 less than the $20,788 payable under the 2025-26 rates, reflecting the 16% to 15% bracket cut.

When do tax brackets change?

Tax brackets change when the Australian Government passes legislation to adjust rates or thresholds, and changes usually take effect from the start of a financial year on 1 July.

Who pays the Medicare levy?

Most Australian residents pay the 2% Medicare levy, though low-income earners may pay a reduced rate or none. It's built into the PAYG withholding tables, so no separate calculation is needed.

Where do I find official tax tables and calculators?

Official PAYG tax tables, calculators, and guidance are available on the Australian Taxation Office website.