Tax brackets are one of the most misunderstood parts of the Australian tax system. Many people assume that earning more automatically pushes all of their income into a higher tax rate, leaving them worse off overall. In reality, Australia uses a progressive tax system, meaning different portions of your income are taxed at different rates.
Understanding how tax brackets actually work can help you make better financial decisions, reduce unnecessary stress at tax time, and give you a clearer picture of what you truly take home.
The Basics – What is a Tax Bracket?
A tax bracket is simply a range of income that is taxed at a specific percentage. As your income increases, only the amount that falls within each bracket is taxed at that bracket’s rate — not your entire salary. This is why discussions around topics like tax on 100k in Australia are often confusing – while $100,000 sounds like a single number, it’s actually taxed in layers.
Australia’s Progressive Tax System Explained
Australia’s tax system is designed so that lower portions of your income are taxed at lower rates, while higher portions are taxed at higher rates. This helps balance the tax burden across income levels. Here’s the key principle to remember: Moving into a higher tax bracket does not reduce your take-home pay. It only increases the tax rate on the income earned above that threshold.
A Simple Example
Let’s say the tax brackets are structured like this (simplified for explanation):
- Income up to a certain amount is tax-free
- The next portion is taxed at a low rate
- The next portion at a higher rate
- And so on
If you earn $100,000, your income is split across multiple brackets, not taxed at one flat percentage.
Why People Think Higher Income Means “More Tax Overall”
The confusion usually comes from hearing statements like:
- “You’ll be pushed into a higher tax bracket”
- “You’ll lose money if you earn more”
While it’s true that some of your income may be taxed at a higher rate, your total after-tax income still increases when you earn more. The only scenario where earning more feels worse is when other factors come into play, such as:
- Loss of government benefits or offsets
- Student loan repayments increasing
- Child support or Medicare Levy Surcharge thresholds being triggered
These are separate from tax brackets themselves but often get lumped into the same conversation.
Marginal Tax Rate vs Average Tax Rate
This distinction is crucial.
- Marginal tax rate: This is the tax rate applied to the last dollar you earn.
- Average tax rate: This is your total tax paid divided by your total income.
Most people focus on the marginal rate because it sounds scary, but your average tax rate is always lower due to the lower brackets applying to most of your income.
Why Understanding Tax Brackets Matters
Knowing how tax brackets work can help you:
- Evaluate pay rises and bonuses more confidently
- Make smarter salary packaging decisions
- Understand overtime, commissions, or contract income
- Plan for tax obligations if you’re self-employed
It also helps remove the fear that earning more money somehow puts you at a disadvantage — which simply isn’t true under a progressive tax system.
The Bottom Line
Tax brackets don’t punish you for earning more — they tax income in stages. Each bracket applies only to the portion of income that falls within it, not your entire salary. Once you understand this layered approach, tax becomes far less intimidating and far more predictable. Whether you’re negotiating a raise, considering a side hustle, or just trying to make sense of your payslip, understanding how tax brackets actually work puts you back in control of your finances.
