What is the tax-free threshold in Australia?

Understanding how the tax-free threshold works in Australia is essential for every taxpayer. Whether you’re new to the workforce, switching jobs, or simply reviewing your financial status, knowing how much income you can earn before paying tax helps you manage your finances better. In this article, you will learn what is the tax-free threshold in Australia, how it applies, and how it fits into the bigger picture of personal income tax.

What is the tax-free threshold?

The tax-free threshold is the amount of income you can earn each financial year without paying any income tax. For the 2024–25 financial year, this amount remains at $18,200.

This means if you’re an Australian resident for tax purposes and earn $18,200 or less in taxable income, you won’t pay any tax at all. The moment your income exceeds that figure, the part above it is taxed at progressive rates — starting from 16%.

How does the tax-free threshold work?

If you claim the threshold:

• Only amounts over $18,200 are taxed.
• You get more take-home pay during the year.

Tax brackets for the 2024–25 financial year

Australia uses a progressive income tax system. Once your income goes above the tax-free threshold, the following tax brackets apply:

• $0 – $18,200: Tax-free
• $18,201 – $45,000: 16% for every dollar over $18,200
• $45,001 – $135,000: $4,288 plus 30% for every dollar over $45,000
• $135,001 – $190,000: $31,288 plus 37% for every dollar over $135,000
• $190,001 and over: $51,638 plus 45% for every dollar over $190,000

These rates do not include the Medicare levy, which is typically an additional 2% on your taxable income.

Who can use the tax-free threshold?

The majority of Australian residents for tax purposes can use the tax-free threshold. 

1. You currently live in Australia and intend to make it your permanent home.
2. Australia on an ongoing basis.

Foreign and temporary residents

• Short-term residents, like working holidaymakers, also have varying rules. 
• If you’re unsure about your residency, there is a consultation option available either with the ATO or a registered tax agent, given the significant impact it would have on your taxation.

You can claim tax-free exemption against one employer only, which is usually the one that pays you the most.

1. Claim the threshold from your best-paying employer.
2. Do not claim it from your other employers since they will take more tax out to make sure you pay your tax on all sources of income.
3. Incorrectly claiming the threshold from more than one employer can lead to underpaid tax, and you will have a tax debt when you submit your return.

How does it impact your take-home pay?

When you receive the tax-free threshold, less tax is deducted from your wages during the year, leaving you with more take-home pay. The key benefits of claiming the threshold properly are:

1. Increased cash flow during the year.
2. Prevention of unnecessary overpayment of tax.
3. But if you don’t bring your claim up to date when you change jobs or claim from more than one job when you shouldn’t, you might have difficulties.

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

If you don’t claim the threshold:

• Your employer will withhold tax from the first dollar of your income
• You won’t miss out on the benefit — it will be factored in at tax time when the ATO calculates your overall income

Australian income tax rates (2024–25)

Below is a simplified overview of the marginal tax rates for Australian residents, excluding the Medicare levy:

• Income exceeding $180,000 is taxed at a rate of 45%.
• Most people also pay an extra 2% Medicare levy, which goes towards Australia’s public health system.

How to claim or change the tax-free threshold

1. At the beginning of a new job, fill in your TFN declaration and confirm if you want to claim the threshold.
2. When you change jobs, let your new employer know if you have already claimed the threshold in another job.
3. If your circumstances change, you can notify your employer at any time if you need to change which job that deducts the threshold.
4. The ATO automatically factors in the tax-free threshold when assessing your tax return.

Common mistakes to avoid

Steer clear of these common mistakes to stay on top of your tax obligations:

1. Forgetting to update your tax status when changing jobs.
2. Misunderstanding your residency status, which affects eligibility.
3. Failing to claim the threshold when eligible can result in paying more tax than necessary.
4. Being up to date and organised can assist in achieving smoother tax results and reducing surprises at tax time.

Benefits of understanding the tax-free threshold

• Optimise your take-home pay during the year.
• Minimise paying tax unnecessarily.
• Avoid possible tax debts or large variations.
• Assure your tax returns are correct and compliant.
• Manage your cash flow better, particularly if you have more than one job or work casually.

This information is especially helpful for:

• Students entering the labor market.
• Casual, part-time, and gig economy workers.
• Individuals with multiple sources of income.
• Individuals are coming back to work after taking a break.

Conclusion

The tax-free threshold is a precious asset of the Australian tax system that serves to cut down tax charges for low and middle-income individuals. Knowing how it operates, who qualifies, and how to handle it in the right manner can enhance your planning and decrease the likelihood of tax complications. Always double-check your tax-free threshold status, particularly when you switch jobs or income sources.