Most Australians know their marginal tax rate, but few truly understand their effective tax rate—the figure that shows what you actually pay the ATO as a share of your total income. With sweeping 2025 tax reforms now in effect, understanding your effective tax rate isn’t just a matter of curiosity—it could shape your financial decisions for the year ahead.
What Is the Effective Tax Rate?
Your effective tax rate is the percentage of your total income that you pay in tax. Unlike the marginal tax rate—which only applies to your top dollar earned—the effective rate looks at your total tax bill divided by your total (taxable) income. It’s the most honest measure of what you really pay, after deductions and offsets are factored in.
- Marginal tax rate: The tax rate on your next dollar of income.
- Effective tax rate: Total tax paid ÷ total taxable income.
For example, if you earned $90,000 and paid $17,500 in tax, your effective tax rate would be 19.4%—even though your marginal rate may be 32.5% or higher.
How Do You Calculate Your Effective Tax Rate?
To work out your effective tax rate for the 2024–25 financial year, follow these steps:
- Determine your total taxable income. This includes salary, investment income, business profits, and other assessable sources.
- Subtract deductions and offsets. These might include work-related expenses, charitable donations, super contributions, and the low income tax offset (LITO) or the seniors and pensioners tax offset (SAPTO).
- Calculate your total tax paid. Refer to your ATO Notice of Assessment or online tax return summary for your total tax liability after offsets.
- Divide total tax paid by total taxable income. Multiply by 100 to get a percentage.
Example calculation (2025):
- Taxable income: $85,000
- Total tax paid (after offsets): $15,500
- Effective tax rate: ($15,500 ÷ $85,000) × 100 = 18.2%
With the 2025 tax cuts now in effect, most middle-income earners will see a lower effective tax rate compared to previous years, even as their marginal rates drop.
2025 Policy Changes: What’s Different This Year?
The Albanese government’s revised Stage 3 tax cuts, effective from 1 July 2024, have reshaped the tax landscape for millions of Australians. Key changes impacting effective tax rates include:
- Lower marginal rates for incomes between $45,000 and $135,000. For example, the 32.5% bracket is now 30% up to $135,000.
- Higher low and middle income offsets. The LITO remains, and the Medicare levy threshold has increased, further reducing effective rates for lower- and middle-income earners.
- Wider tax brackets. More of your income is taxed at lower rates, especially for those earning between $45,000 and $200,000.
For a typical Australian earning $80,000, the total tax bill in 2025 is around $1,500 lower than in 2024, dropping their effective tax rate by nearly two percentage points.
Why Your Effective Tax Rate Matters
Understanding your effective tax rate gives you a truer picture of your tax burden—and can help you make smarter financial decisions:
- Budgeting: Knowing your real after-tax income helps you plan for savings, investments, or major expenses.
- Salary negotiations: The next pay rise might not be as heavily taxed as you think—your effective rate shows the real take-home impact.
- Tax planning: Deductions and offsets can significantly reduce your effective rate, so strategies like salary sacrificing to super or claiming work-related expenses are more impactful than ever in 2025.
- Comparisons: Your effective tax rate lets you benchmark yourself against national averages or see the impact of policy changes over time.
According to Treasury projections, the average effective tax rate for all Australians will fall in 2025, with most relief going to households earning between $50,000 and $130,000—a direct result of the new progressive tax bracket design.
Real-World Examples: Effective Tax Rate in Action
Case 1: Sarah, a public school teacher
Sarah earns $75,000 and claims $2,000 in deductions for teaching supplies and union fees. After the 2025 tax cuts, her total tax paid is $12,800. Her effective tax rate: 17.1%—down from 19% last year.
Case 2: Ben, a freelance designer
Ben has variable income—$110,000 this year—and can claim $8,000 in legitimate business expenses. His total tax is $22,900, making his effective rate 20.8%.
Case 3: Priya, a part-time nurse and mum
Priya earns $48,000, claims $1,200 in deductions, and benefits from the LITO. Her effective tax rate is just 9.2%, reflecting both the low income offset and a lower marginal rate from the 2025 reforms.
Takeaways for 2025 and Beyond
Your effective tax rate is the clearest snapshot of your true tax burden. With the 2025 reforms in full swing, most Australians will see this figure drop—especially if you take full advantage of deductions and offsets.
