Understanding how much tax you actually pay is more complicated than it seems. The key? Australia’s marginal tax rate system. As we head into 2025, recent changes to income tax brackets and rates are reshaping what you’ll take home—and what you’ll hand over to the ATO. Whether you’re an employee, contractor, or business owner, knowing your marginal tax rate can help you make smarter financial decisions.
What is the Marginal Tax Rate?
The marginal tax rate is the percentage of tax you pay on each additional dollar of income. Unlike a flat tax, Australia uses a tiered system: different portions of your income are taxed at different rates. That means earning more doesn’t push your entire salary into a higher tax bracket—only the part that exceeds the bracket threshold is taxed at the higher rate.
- Example: If your taxable income is $90,000, only the portion above the relevant thresholds is taxed at the highest applicable rate, not your full income.
- This system is designed to be progressive, so higher earners pay a larger share of their income in tax.
2025 Marginal Tax Rates: What’s Changed?
Major tax reforms have arrived in 2025, following the government’s staged rollout of the “Stage 3 tax cuts.” Here’s how the rates and brackets look for Australian residents in the 2024-25 financial year:
- Up to $18,200: Nil
- $18,201 – $45,000: 16%
- $45,001 – $135,000: 30%
- $135,001 – $190,000: 37%
- Over $190,000: 45%
These updated brackets mean millions of Australians will see more money in their pay packets. For instance, someone earning $80,000 saves around $1,700 annually compared to previous years. However, the new brackets also flatten the system in the middle, with the old 32.5% and 37% brackets largely merged into a single 30% rate.
Real-World Impact: How Marginal Rates Affect Your Decisions
Marginal tax rates don’t just affect your payslip—they influence everything from salary negotiations to investment choices and superannuation strategies. Here’s how:
- Salary Increases: Only the extra amount you earn is taxed at the higher rate. If you move from $135,000 to $140,000, only $5,000 is taxed at 37%—not your entire income.
- Salary Sacrifice and Super: Contributing extra to superannuation can be tax-effective if your marginal rate is above the 15% super contributions tax, effectively reducing your taxable income.
- Investment Planning: Capital gains are taxed at your marginal rate. Knowing your bracket helps you plan when to sell assets and how much tax you’ll owe.
Employers and employees alike should check new payroll withholding tables to ensure correct tax is deducted. Contractors and sole traders need to adjust their quarterly PAYG instalments to reflect the new thresholds.
Common Misconceptions and Strategic Takeaways
Many Australians believe that earning more will leave them worse off due to ‘bracket creep’. But with a marginal system, only the income above each threshold is taxed at the higher rate, not your entire salary. Here are some quick takeaways:
- Tax Planning: Knowing your marginal rate can help you structure bonuses, investment sales, or salary packages more efficiently.
- Impact of Policy Changes: The 2025 tax cuts mean more take-home pay for most, especially middle-income earners, but reduce some progressivity in the system.
- Bracket Indexation: The government has not yet committed to annual indexation of tax brackets, so inflation may erode some benefits over time.
