Your marginal tax rate is the rate you pay on your next dollar of income. Your effective tax rate is the total tax you pay divided by your total income. These two numbers are almost never the same, and confusing them leads to one of the most common misconceptions in Australian personal finance: the idea that earning more money could somehow leave you worse off by pushing you into a higher tax bracket.
Key Takeaways
- Marginal rate = the rate on your last dollar of income
- Effective rate = total tax ÷ total income (always lower than marginal rate)
- Crossing a tax bracket threshold never reduces your after-tax income
- Knowing your marginal rate helps you evaluate the real after-tax value of a pay rise, side income, or deduction
- At $80,000 income, the marginal rate is 32.5% but the effective rate is around 22.6%
What Is the Marginal Tax Rate?
Your marginal tax rate is the rate that applies to the next dollar you earn — the rate at the top of the bracket your income currently sits in.
For FY2025–26, the marginal rates are:
| Income Range | Marginal Rate |
|---|---|
| $0 – $18,200 | 0% |
| $18,201 – $45,000 | 19% |
| $45,001 – $135,000 | 32.5% |
| $135,001 – $190,000 | 37% |
| $190,001+ | 45% |
If you earn $90,000, your marginal rate is 32.5%. That means if you earn an extra $1,000, you keep $675 and pay $325 in tax.
The marginal rate matters when:
- Evaluating the real value of a pay rise
- Deciding whether to salary sacrifice into super (you save at your marginal rate)
- Assessing the benefit of a tax deduction
- Deciding whether to take on additional work
What Is the Effective Tax Rate?
Your effective tax rate is the percentage of your total income that goes to the ATO. It is always lower than your marginal rate because lower rates apply to the income in earlier brackets.
Formula: Effective rate = Total income tax ÷ Taxable income × 100
Example: $90,000 taxable income
| Bracket | Income in bracket | Tax |
|---|---|---|
| $0 – $18,200 | $18,200 | $0 |
| $18,201 – $45,000 | $26,800 | $5,092 |
| $45,001 – $90,000 | $45,000 | $14,625 |
| Total | $19,717 |
Medicare levy: $90,000 × 2% = $1,800
Total tax: $21,517 Effective tax rate: 23.9% Marginal tax rate: 32.5%
Even though this person is in the 32.5% bracket, they keep 76.1 cents of every dollar on average.
Why the Bracket Myth Is Wrong
Some people believe that a pay rise that crosses a bracket threshold leaves them worse off, because “all their income will be taxed at the higher rate.” This is incorrect.
In Australia’s progressive system, only the income above the threshold is taxed at the higher rate. If you earn $44,900 and receive a $200 pay rise to $45,100:
- $44,900 is taxed at the rates for the lower brackets as before
- Only the $100 above $45,000 is taxed at 32.5% (instead of 19%)
- The extra tax on that $100 is $13.50 — you still take home $86.50 of the $200 raise
You cannot be made worse off by earning more in a progressive tax system.
Marginal Rate vs Effective Rate: Side by Side
| Annual Income | Marginal Rate | Income Tax | Medicare Levy | Total Tax | Effective Rate |
|---|---|---|---|---|---|
| $40,000 | 19% | $4,342 | $800 | $4,567* | 11.4% |
| $60,000 | 32.5% | $9,967 | $1,200 | $11,167 | 18.6% |
| $80,000 | 32.5% | $16,467 | $1,600 | $18,067 | 22.6% |
| $100,000 | 32.5% | $22,967 | $2,000 | $24,967 | 25.0% |
| $150,000 | 37% | $40,567 | $3,000 | $43,567 | 29.0% |
| $200,000 | 45% | $60,667 | $4,000 | $64,667 | 32.3% |
$40,000 includes LITO reduction. Figures are estimates.
Notice that even at $200,000 income — where the top rate is 45% — the effective rate is only 32.3%. The top rate applies only to income above $190,000.
Using the Marginal Rate for Decision-Making
Should I salary sacrifice into super?
Salary sacrifice contributions are taxed at 15% in the super fund. If your marginal rate is 32.5%, you save 17.5 cents per dollar contributed. At 37%, you save 22 cents. The higher your marginal rate, the more you benefit from salary sacrifice.
What is a deduction actually worth to me?
A $1,000 deduction saves you: $1,000 × your marginal rate. At 32.5%, a $1,000 deduction saves $325. At 19%, it saves $190.
Is the overtime worth it?
If your marginal rate is 32.5%, you keep 67.5% of any extra income. At 37%, you keep 63%. After Medicare levy, the retentions are 65.5% and 61% respectively.
Frequently Asked Questions
What is the marginal tax rate in Australia for 2025–26? It depends on your income. For most working Australians, the marginal rate is 32.5% (income $45,001–$135,000). The rates range from 0% (below $18,200) to 45% (above $190,000).
Why is my effective rate lower than my marginal rate? Because the lower rates still apply to the portions of your income in the lower brackets. Your marginal rate is the rate on your last dollar, not on all dollars.
Can I reduce my marginal tax rate? Yes — by reducing your taxable income through deductions or salary sacrifice, you may push your income into a lower bracket. This is one reason salary sacrifice into superannuation is popular for mid-to-high earners.
What is the average effective tax rate in Australia? It varies significantly by income. The ATO’s data shows that Australians with taxable income around the median (~$60,000–$70,000) typically pay effective rates of 18–20% including the Medicare levy.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.