How Australian income tax works

A single Australian salary can have four different amounts taken out of it: income tax, the Medicare levy, the Medicare levy surcharge, and a compulsory study-loan repayment. Each is worked out differently, each starts at a different threshold, and two of them are assessed on a definition of income that is not your taxable income. That is why a payslip almost never matches one headline percentage.

Everything below is the 2026-27 scale for Australian residents for tax purposes. Non-residents and working holiday makers are taxed on different scales.

A higher bracket never lowers your take-home pay

The most common misunderstanding about Australian income tax is that crossing into a higher bracket applies the higher rate to everything you earn. It does not. Each rate applies only to the slice of income that falls inside its own band. Moving up a bracket changes what happens to the next dollar, and nothing at all to the dollars below it.

Take the step out of the 15% band and into the 30% band. On a taxable income of $44,000, income tax and the Medicare levy together come to $4,750, leaving $39,250. On $46,000 they come to $5,240, leaving $40,760. The extra $2,000 of gross pay puts $1,510 more in the hand: the first $1,000 sits in the 15% band, the second in the 30% band, and the levy applies to both.

The same holds at the top of the scale. Going from $189,000 to $191,000 crosses into the 45% band and still leaves $1,140 more after tax and levy. There is no income at which one extra dollar of salary leaves you worse off under the income tax scale — the arithmetic makes it impossible. Means-tested payments and thresholds elsewhere in the system can behave differently, but the tax scale itself cannot.

The tax-free threshold

The first $18,200 of taxable income is taxed at nil. It is the first band of the same scale rather than a rebate applied at the end, so every resident taxpayer gets the benefit of it — including someone on $500,000, whose first $18,200 is untaxed too.

The Medicare levy has its own, higher starting point, so there is a stretch of income where income tax applies and the levy does not. At a taxable income of $20,000, income tax is $270.00 and the Medicare levy is nil.

The 2026-27 rates

The last column is the tax on a whole income that lands exactly at the top of each band: $4,020 on $45,000, $31,020 on $135,000, and $51,370 on $190,000 — an average rate of 27.0% against a marginal rate of 45% on the next dollar. That gap between the marginal rate and the average rate is the entire point of a banded scale.

Two things sit outside this table. Employer Super Guarantee contributions — 12% of ordinary time earnings — are paid on top of salary and are not part of taxable income; they are taxed inside the fund instead. And Division 293 tax applies to concessional super contributions where combined income and contributions exceed $250,000.

The Medicare levy

The levy is 2% of taxable income, charged on top of income tax and shown as a separate line on a notice of assessment. It has a low-income shade-in rather than a hard cut-off: nil at or below $27,222, then 10c for every dollar above that figure, until the full 2% takes over at $34,027.

The effect is a gradual entry. At a taxable income of $30,000 the levy is $277.80, not the $600.00 a flat 2% would produce. The two methods meet within a few cents at $34,027, so there is no step. Those are the single-person thresholds; the ATO publishes separate, higher ones for families and for seniors and pensioners, and reindexes them each year.

The Medicare levy surcharge

The surcharge is a different charge from the levy, and it is not assessed on the same income. It applies to income for MLS purposes — taxable income plus reportable fringe benefits, net investment losses and reportable super contributions — so anything salary sacrificed into super is added back before the test is applied.

Family thresholds are twice the single figures, plus $1,500 for each dependent child after the first.

Two features make the surcharge behave unlike the income tax scale. First, it is only payable where an appropriate level of private patient hospital cover is not held: holding that cover reduces the surcharge to nil, and the premium is a separate cost that depends on the policy and the insurer. Which of the two amounts is larger depends entirely on individual circumstances — the ATO and the insurer are the authorities on the respective figures, and a licensed adviser can advise on a particular situation.

Second, the rate applies to the whole of MLS income, not just the part above the threshold. A single person on $123,000 without hospital cover pays $1,230; on $130,000 they pay $1,625. The extra $7,000 of income adds $395 to the surcharge, because it lifts the whole amount into the next tier.

HELP repayments

A compulsory HELP repayment is not a tax; it repays a debt, and it is collected through the tax system. It is worked out on repayment income, which — like the surcharge — adds reportable fringe benefits, net investment losses and reportable super contributions back to taxable income. Salary sacrificing into super lowers income tax and the Medicare levy but leaves the compulsory repayment unchanged, which is the usual reason a repayment comes out higher than expected.

Since 1 July 2025 the calculation has been marginal rather than a flat percentage of the whole. Nothing is repaid on the first $69,528 of repayment income.

On $100,000 of repayment income the compulsory amount is $4,571 — 4.6% of the total, even though the rate inside that band is 15%. From $186,051 the calculation switches to 10% of the whole repayment income; at the changeover both methods produce $18,605, so nothing jumps. The HELP repayment calculator runs these bands.

What changes on 1 July 2027

One number in the rate table changes. The rate on income between $18,200 and $45,000 falls from 15% in 2026-27 to 14% in 2027-28. It is already law, under the Treasury Laws Amendment (Cost of Living Tax Cuts) Act 2024 — the same Act that took that rate from 16% to 15% on 1 July 2026. No threshold moves, and the 30%, 37% and 45% rates are unchanged.

Because only that one band changes, and because everyone earning above $45,000 uses the whole of it, the dollar effect is identical at every taxable income at or above $45,000: $268 a year. Below that, it is one percentage point of the income above the tax-free threshold.

The figures above are income tax only. The Medicare levy is unchanged at 2%, and the surcharge tiers and HELP thresholds are set separately and indexed on their own cycles.

The four charges together

For a single person on a taxable income of $130,000 in 2026-27, with no private hospital cover and a HELP debt:

• Income tax: $29,520
• Medicare levy at 2%: $2,600
• Medicare levy surcharge at 1.25%: $1,625
• Compulsory HELP repayment: $9,076

That totals $42,821, leaving $87,179. Tax and levies on their own account for $33,745 — 26.0% of gross — while the marginal rate on the next dollar earned is 30% plus the 2% levy. The HELP line is not tax at all; it reduces a debt.

The order in which the four are applied is what makes the system hard to eyeball. Income tax and the Medicare levy are worked out after salary sacrifice reduces taxable income; the surcharge and the HELP repayment are worked out on income definitions that add those contributions back. The take-home pay calculator applies all four to a single figure, and where do you rank shows where that figure sits against ATO data for other taxpayers.