Determining and calculating marginal tax rates starts with knowing how much you or your employees earn each year. With this information, you can find the correct tax bracket and marginal tax rate to use.
In this guide, you'll learn about marginal tax, Australia's progressive tax system and how to determine the tax you or your employees will need to pay.
What is a marginal tax rate?
A marginal tax rate is used in a progressive tax system, like Australia's. The Australian Tax Office (ATO) uses tax brackets to determine the amount of income tax individuals need to pay.
As your salary increases, your income might go over a tax threshold and into a new bracket. However, only the portion of income over the threshold is taxed at a higher rate. The rate that corresponds to the highest tax bracket is called your marginal tax rate.
Significance of marginal tax rates in accounting
Marginal tax rates are significant in accounting because you can use them to save on tax. For example, you should consider how much business income you expect to make when choosing your business structure.
If you operate as a sole trader, your marginal tax rates on your business income are the same as if you were employed. However, company income tax isn’t progressive – large businesses pay a flat rate of 30% of their taxable income, and small businesses pay 25%. Therefore, you can end up paying more tax operating as a sole trader than if your business was structured as a company.
If you have employees, marginal tax rates can also affect how much you pay your team and how you manage payroll. Cloud payroll software can, however, easily manage these calculations and make life a lot easier for you.
How do marginal tax rates work?
Marginal tax rates work by taxing income over certain thresholds at higher rates. In Australia, the first marginal tax threshold is $18,200. This means that for every dollar over $18,200, your marginal tax rate is 16% up to $45,000.
The next marginal rate applies if your annual income then goes up to $45,001; you pay $4,288 and a marginal tax rate of 30% for each dollar over $45,000, until $135,000.
Tax rates and brackets
Tax rates and brackets are related – money earned in each tax bracket comes with a different marginal tax rate. Australia has five PAYG tax brackets and marginal tax rates. In the FY 2024-25, these are:
$0 to $18,200 – marginal tax rate 0%
$18,201 to $45,000 – marginal tax rate 16%
$45,001 to $135,000 – marginal tax rate 30%
$135,001 to $190,000 – marginal tax rate 37%
$190,001+ – marginal tax rate 45.00%
How to calculate your marginal tax rate
To calculate your marginal tax rate, simply find the tax bracket in which your yearly income falls and the corresponding marginal tax rate. However, calculating how much tax you'll actually pay is more complicated. That's because as you move up tax brackets, not all your income will be taxed at the higher rate.
Here's how to manually calculate your marginal tax rates and how much you might pay in Australia.
$0 to $18,200, taxed at 0% = nothing to pay
$18,201 to $45,000 taxed at 16% = 16c for each dollar over 18,200
$45,001 to $135,000 taxed at 30% = $4,288 plus 30c for each dollar over $45,000
$135,001 to $190,000 taxed at 37% = $31,288 plus 37c for each dollar over $135,000
$190,001+ taxed at 45% = $51,638 plus 45c for each dollar over $190,000
Your actual tax to pay may also vary if you've claimed any deductions against your income or if you need to pay the Medicare Levy Surcharge.
What is the marginal tax rate for foreign residents?
Marginal tax rates for foreign residents differ from those for permanent Australian residents and citizens. There’s no tax-free threshold, and income is subject to marginal tax rates between 30% – 45%.
$0–$135,000 taxed at 30c for each dollar
$135,001 to $190,000 taxed at 37% = $40,500 plus 37c for each $1 over $135,000
$190,001+ taxed at 45.00% = $60,850 plus 45c for each $1 over $190,000.
Marginal tax rate for under 18s
Marginal tax rates for under-18s are higher than rates for adults. This discourages people from diverting income to their children to avoid tax. However, some minors and some types of income are considered 'excepted' and will be taxed at the same rate as an adult. Most minors with after-school jobs will fall into this category.
Income for minors that doesn't fall into the 'excepted' category is taxed at these marginal rates:
$0-$416, taxed at 0% = nothing to pay
$417 – $1,307 taxed at 66% = 66% of anything over $416, up to $1,307
$1,307+ taxed at 45% = flat rate for all income that isn’t excepted income
Marginal tax rate FAQs
What is the difference between a marginal tax rate and an effective tax rate?
The difference between a marginal tax rate and an effective tax rate is that your effective tax rate is the percentage of your annual income you pay in tax. Your marginal tax rate is the rate attached to your last dollar earned.
Because Australia has a progressive tax system, your effective tax rate will be lower than your marginal rate. For example, if you earn $45,000 a year, your marginal tax rate is 16%. However, your first $18,200 is untaxed, so you’ll pay just $4,288.00 tax in total (16% of $45,000 - $18,200). As a percentage of your income, that’s 9.52% – your effective tax rate.
What is the marginal tax rate if I earn $100k per year?
The marginal tax rate if you earn $100k per year is 30% in Australia, although your effective tax rate will be lower.
What is the highest tax bracket?
The highest tax bracket in Australia is $190,001+, which is taxed at a marginal rate of 45%.
When do I need to start paying tax?
You need to start paying tax in Australia when you're a citizen or permanent resident and you earn more than $18,200. Before this, your earnings are in the tax-free bracket.
If you're a foreign resident, different marginal tax rates apply, and you must start paying tax as soon as you start earning money in Australia.
Make it marginally less taxing
Australia's PAYG system makes it simple for employees to keep up with their tax obligations. However, business owners need to know how marginal tax rates work, how they impact effective tax rates and how they could help minimise business income tax.
MYOB helps you manage marginal rates and other tax complexities with ease. Award-winning accounting software and payroll systems help you keep track of employee earnings and automatically comply with changes to tax rates and regulations. Even better, MYOB does all your tax calculations for you, factoring in employee benefits, deductions and entitlements.
Sick of tax rate confusion? Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation, including filing your BAS return or annual tax statements, then you should consult with your accountant or other registered tax adviser.