If you’re an Australian taxpayer, understanding the tax-free threshold will help you manage your finances better and not pay too much.

Let’s dive in and find out the tax-free threshold, how it works, and why it matters to you.

What is the Tax-Free Threshold?

The tax-free threshold is the amount you can earn without paying income tax each financial year. In Australia, as of 2025, this is $18,200. So, if you’re an Australian resident, for tax purposes, you won’t pay any tax on the first $18,200 you earn in a financial year.

The tax-free threshold is a fixed amount that is adjusted annually, and it applies to all taxable income earned from 1 July of each year.

How the Tax-Free Threshold Works

Australia has a progressive tax system where the amount of tax you pay increases as your income increases. The tax-free threshold is the base of this system. Here’s a simple breakdown:

• You pay no tax on the first $18,200 you earn.
• For income above $18,200, you start paying tax at increasing income tax rates.
• For example, if your annual income is $30,000, the first $18,200 is tax-free, and you only pay tax on the remaining $11,800.

This helps lower-income earners keep more of their earnings, and those with higher incomes contribute more to the tax system.

Eligibility for the Tax-Free Threshold

To be eligible for the full tax-free threshold, you must be an Australian resident for tax purposes for the entire financial year. If you become or stop being an Australian resident during the year, you’re entitled to a pro-rata tax-free threshold.

For part-year residents, the tax-free threshold is calculated like this:

• $13,464 flat amount
• Plus up to $4,736 adjusted for the number of months you were an Australian resident.

This pro-rata system means people who aren’t residents for the full year still get a portion of the tax-free threshold.

Claiming the Tax-Free Threshold

When you start a new job, you’ll usually fill out a Tax File Number Declaration form. On this form, you can claim the tax-free threshold. If you have multiple jobs, it’s best only to claim the tax-free threshold from one employer. This will prevent you from ending up with a tax debt at the end of the financial year.

If you forget to claim the tax-free threshold or your circumstances change, don’t worry. You can still claim it when you lodge your tax return at the end of the financial year.

How Income Tax Withholding Works

Tax withholding is when your employer withholds a portion of your income and pays it to the ATO on your behalf. The amount of tax withheld depends on your income level and the tax rates that apply to you. 

If you have multiple jobs or income sources, you may need to adjust your tax withholding to avoid an unexpected tax bill at the end of the year. You can complete a PAYG withholding variation application and submit it to your employer. Proper management of tax withholding ensures that you are not left with a large tax debt when you lodge your tax return.

Benefits of the Tax-Free Threshold

The tax-free threshold has several benefits:

• More take-home pay: You get to keep more of your earnings, which is great for low-income earners.
• Less tax: It reduces your overall tax rate.
• Simpler tax returns: If you earn under $18,200, you might not need to lodge a tax return.

These benefits make the tax-free threshold an important part of the Australian tax system, especially for those with lower incomes or who are part-time workers.

Tax Rates and Thresholds 2025-26

Here are the current tax rates and thresholds for Australian residents:

Your annual taxable income determines which tax bracket you fall into and how much you must pay.

These rates don’t include the Medicare levy of 2%, which most Australian residents pay on top of their income tax.

Special Considerations

When thinking about the tax-free threshold, it’s important to remember that it doesn’t cover every aspect of your tax obligations. Here are some special considerations to keep in mind.

Medicare Levy

Most Australian residents pay a 2% Medicare levy in addition to their income tax. This levy helps fund Australia’s public health system. The levy is calculated based on your taxable income, so it does not apply to the tax-free threshold portion of your earnings.

Medicare Levy Surcharge

If you earn above a certain income threshold and don’t have adequate private hospital cover, you may also have to pay the Medicare Levy Surcharge (MLS) on top of the standard 2% levy. The surcharge is between 1% and 1.5% of your income, depending on how much you earn. It is designed to encourage higher-income earners to take out private health insurance and reduce demand on the public system.

Multiple Jobs and the Tax-Free Threshold

If you have multiple jobs, you should only claim the tax-free threshold from your highest-paying job. If you claim it from multiple employers, you might not have enough tax withheld throughout the year and end up with a tax debt when you lodge your return.

You’ll pay tax from the first dollar you earn for your second and subsequent jobs. While this might seem unfair, it helps ensure you pay enough tax yearly to cover your total tax liability.

Change of Job During the Income Year

If you change jobs during the income year, your previous employer will stop paying you, and you will start receiving income from your new employer. 

You can claim the tax-free threshold from your new employer even if you have claimed it from your previous employer. To choose whether to claim the tax-free threshold from your new employer, complete a tax file number (TFN) declaration. 

Your payer will determine how much tax to withhold from their payments to you. This ensures that you continue to benefit from the tax-free threshold without interruptions.

Part-Time and Casual Workers

The tax-free threshold is especially good for part-time and casual workers. If you earn under $18,200 per year, you might not have to pay any income tax. But you might still need to lodge a tax return to get back any tax that was withheld from your pay.

Students and the Tax-Free Threshold

For students who work part-time or casually, the tax-free threshold can be a big help. It allows you to earn a reasonable amount from part-time work without paying tax,, which can greatly help when balancing study and work commitments.

Tax-Free Threshold and Superannuation

Note that the tax-free threshold applies to your taxable income and doesn’t include employer superannuation contributions. These are taxed separately at 15% for most people. Understanding this will help you plan for your retirement savings while maximising the tax-free threshold on your take-home pay.

Tax Offsets and Deductions

Tax offsets and deductions are powerful tools that can help reduce your tax bill:

• Tax offsets (like the Low Income Tax Offset or LITO) directly lower the amount of tax you owe, dollar-for-dollar.
• Tax deductions reduce your assessable income, which then reduces the amount of tax calculated on that income.

Low Income Tax Offset (LITO)

From 2025, eligible taxpayers can receive up to $700 in LITO. You’ll receive the full amount if your taxable income is $37,500 or less. The offset phases out gradually as your income increases:

• 5 c per $1 for income between $37,501 and $45,000
• 1.5 c per $1 for income between $45,001 and $66,667
  Above $66,667, the offset is fully phased out. This offset is non-refundable, meaning it can reduce your tax payable to $0, but you won’t receive any unused portion as a refund. Combined with the tax-free threshold, this means some people don’t pay any income tax up to around $22,575 before Medicare levy begins.

Low and Middle Income Tax Offset (LMITO)

LMITO is no longer available for the 2024–25 and later years.

Other Offsets

There are various other offsets, such as for seniors, zone allowances, or spouse super contributions—that may be available depending on your circumstances. Their eligibility is often complex, so it’s worth reviewing or seeking professional advice.

Deductions

You can reduce your assessable income by claiming deductions for eligible expenses, including:

• Work-related costs
• Tax return preparation
• Charitable donations
• Investment expenses

Be sure to keep detailed records to support your claims.

Claiming Them

LITO is applied automatically by the ATO when you lodge. To claim other offsets or deductions, ensure you include all necessary information and documentation with your return.

Frequently Asked Questions

Can I claim the tax-free threshold if I’m not an Australian resident?

No, non-residents are not eligible for the tax-free threshold. They pay tax on every dollar earned in Australia, starting at 32.5% for income up to $120,000.

What happens if I don’t claim the tax-free threshold?

If you don’t claim the tax-free threshold your employer will withhold tax from your entire income at a higher rate. But you can get back any overpaid tax when you lodge your tax return.

How does the tax-free threshold work with superannuation?

The tax-free threshold applies to your taxable income, which doesn’t include employer superannuation contributions. These are taxed separately at 15% for most people.

Can I claim the tax-free threshold if I’m under 18?

Yes, you can claim the tax-free threshold if you’re under 18. However, different tax rates may apply to minors’ unearned income (such as interest or dividends).

Key Points

• The tax-free threshold is $18,200.
• Australian residents, for tax purposes, get the full tax-free threshold.
• Part-year residents get a pro-rata tax-free threshold.
• Only claim the tax-free threshold from one employer if you have multiple jobs.
• The tax-free threshold is part of the progressive tax system.
• Remember to include the Medicare levy and tax offsets in your calculation.
• Consider the private health insurance rebate when calculating your overall tax liability.