by Ruby Chowdhury

One fundamental but often misunderstood concept is tax brackets and how they work. Tax brackets are used for taxes on individuals however it is important to understand how they work when determining how to distribute your income if generated through a trust or company.

Leading up to the end of the tax year 2025, we break it down in simple terms so you can keep more of your hard-earned money.

We will also explain the proposed Federal Budget tax cut on the lowest tax bracket and how it practically operates.

What Are Tax Brackets?

Australia uses a progressive tax system, meaning the more you earn, the higher the tax rate applied to your income personally.

Rather than applying a single rate to all income, tax brackets ensure that only portions of income are taxed at higher rates.

The Current Tax Brackets For 2025

• 0% – Tax Free Threshold: No tax on each dollar paid up to $18,200
• 16% Tax Bracket: 16% on each dollar over $18,200 up to $45,000
  • from 1 July 2026, the 16% tax rate will decrease to 15%
  • from 1 July 2027, this rate will be further reduced to 14%
• 30% Tax Bracket: 30% on each dollar over $45,000 up to $135,000
• 37% Tax Bracket: 37% on each dollar over $135,000 up to $190,000
• 45% – Top Marginal Tax Rate: 45% on each dollar over $190,000

How Does This Work In Practise?

Many people incorrectly assume that if they are in certain bracket each dollar of their income is taxed at that rate. For example, if your taxable income is $50,000 you are in the 30% tax bracket, but you do NOT pay tax of 30% of $50,000.

As an example, if you are an individual earning $50,000 in the financial year, your tax isn’t calculated at a flat rate on your total income. Instead:

• The first $18,200 is tax-free.
• The next $26,800 (from $18,201 to $45,000) is taxed at 16%, resulting in $4,288.
• The remaining $5,000 (from $45,001 to $50,000) is taxed at 30%, resulting in $1,500 on top of the above.

In total, the tax liability for a $50,000 taxable income is $5,788 for the year.

This structure ensures you only pay higher rates on income above certain thresholds, not your entire salary.

Federal Budget Tax Cuts: Further Reduction Of The Lowest Tax Rate

In the 2025–26 Federal Budget announced on 25 March 2025, the Australian Government introduced additional income tax cuts aimed at providing cost-of-living relief to taxpayers.

The new measures include:

• Effective 1 July 2026, the 16% tax bracket will reduce to 15%. This means that for the 12 months from 1 July 2026 to 30 June 2027 you will save up to 1% of tax on each dollar earned from $18,200 to $45,000. i.e. a maximum tax saving of $268 (or $5.15 per week)
• From 1 July 2027, this rate will be further reduced to 14%. This means that for the 12 months from 1 July 2027 to 30 June 2028 you will save up to 2% of tax on each dollar earned from $18,200 to $45,000. i.e. a maximum tax saving of $536 (or $10.30 per week)

How we can help

Understanding how tax brackets work and being proactive about managing your tax obligations can save you from unexpected debts. By staying informed, checking your tax withholdings, and keeping track of all income sources, you’ll be better prepared come tax season. Small steps now can mean a bigger refund – or at least avoiding a nasty surprise!

If you’re unsure, reach out to our team of team of experienced professionals below.