Tax Brackets Don't Work the Way You Think

General information, not financial advice. This article explains how things work in general. It doesn't consider your personal circumstances. Before making decisions about your mortgage, tax or money, consider getting advice from a licensed financial adviser or registered tax agent.

It is one of the most persistent money myths in Australia: "Don't take that pay rise. It'll push you into a higher tax bracket and you'll take home less." People have turned down overtime and promotions because of it.

It isn't true. In Australia's income tax system, moving into a higher bracket can never leave you with less take-home pay. To see why, you need to understand one idea: tax brackets work like a staircase, not a lift.

The 2026–27 rates

Here are the ATO's resident tax rates for the 2026–27 income year. They apply to Australian residents who can claim the full tax-free threshold, and they don't include the 2% Medicare levy.

Look at the wording: "15c for each $1 over $18,200." The rate applies only to the dollars inside each step. Nothing reaches back and re-taxes the dollars you earned below the threshold.

Walking up the staircase

Take someone with a taxable income of $60,000. Their tax is worked out step by step:

• The first $18,200 is tax-free.
• The next $26,800, up to $45,000, is taxed at 15%: $4,020.
• The last $15,000, from $45,000 to $60,000, is taxed at 30%: $4,500.

That adds up to $8,520 in income tax, before the Medicare levy. Their top rate is 30%, but their overall rate is about 14.2% of their income.

Marginal vs average

Those two numbers have names.

Your marginal tax rate is the rate on your next dollar. For the person on $60,000, that's 30%. It tells you how much of a pay rise or extra shift you keep.

Your average tax rate is your total tax divided by your total income. For the same person it's about 14.2%. It tells you how much of your whole income goes in tax.

The myth comes from mixing the two up. People imagine that crossing a threshold applies the higher rate to everything they earn. It only applies to the part above the line.

Crossing a threshold

Now take someone on $134,000 who gets a $6,000 pay rise to $140,000. They've crossed the $135,000 threshold into the 37% bracket. What happens?

• The first $1,000 of the rise, up to $135,000, is taxed at 30%: $300.
• The other $5,000 is taxed at 37%: $1,850.

So they pay $2,150 more income tax and keep $3,850 of the $6,000, before the Medicare levy. Their average rate edges up from about 22.9% to about 23.5%. They are clearly better off. Crossing the line simply means the last few thousand dollars are taxed a bit more heavily.

What about the Medicare levy?

Most taxpayers also pay a Medicare levy of 2% of taxable income. Some people on low incomes pay a reduced levy or none, and some people on higher incomes without private hospital cover pay an extra Medicare levy surcharge. Those rules have their own thresholds, and a few of them can create small bumps for particular people. For most wage earners, though, the core point holds: a pay rise means more money in your pocket.

Where the myth does have a grain of truth

There are a few places where earning more can cost you more than your marginal tax rate suggests. Government payments and concessions that phase out as income rises, such as some family payments, can claw back part of each extra dollar. Student loan repayments also rise with income. Those "effective" marginal rates can be high, and they're worth understanding before you plan around a pay rise. But they come from payment and repayment rules, not from tax brackets themselves.

The bottom line: don't turn down a pay rise because of a tax bracket. Know your marginal rate, so you know what you'll keep from each extra dollar.

Illustrative examples. The worked examples use the ATO's 2026–27 resident rates, ignore the Medicare levy, offsets and deductions, and are rounded. Your own tax depends on your circumstances; use the ATO's calculators or speak to a registered tax agent.