Tax-Free Threshold Australia 2025-26: Everything You Need to Know

The tax-free threshold is one of the most important — and most misunderstood — parts of Australia's tax system. It means the first $18,200 of your annual income is completely free of income tax. But there is much more to it than that single number.

Use our Australian pay calculator to see your exact take-home pay based on the tax-free threshold and current 2025-26 rates.

What Is the Tax-Free Threshold?

The tax-free threshold is the amount of income an Australian resident can earn each financial year before paying income tax. For 2025-26, this amount is $18,200 — unchanged for many years.

When you earn above $18,200, you only pay tax on the amount above the threshold. The 2025-26 income tax brackets apply to the remaining income:

The Effective Tax-Free Amount: ~$22,575

While the formal tax-free threshold is $18,200, the Low Income Tax Offset (LITO) means low-income earners effectively pay no tax up to around $22,575.

Here is how it works: the LITO is a tax offset of up to $700 for residents earning up to $37,500. A $700 offset at the 16% marginal rate is equivalent to ~$4,375 of extra tax-free income. Adding $18,200 + $4,375 ≈ $22,575.

Who Can Claim the Tax-Free Threshold?

You can claim the tax-free threshold if you are an Australian resident for tax purposes. This includes:

• Australian citizens and permanent residents
• Temporary residents who meet the residency tests
• New arrivals who become Australian tax residents

Non-residents for tax purposes cannot claim the threshold and are taxed at a higher flat rate (32.5% from the first dollar up to $120,000).

How to Claim the Tax-Free Threshold

You claim the threshold by completing a Tax File Number (TFN) declaration when starting a new job. On the form, you answer:

"Do you want to claim the tax-free threshold from this payer?" → Answer: Yes (for your main job only)

Answering "Yes" tells your employer to use a lower withholding rate so less tax is taken from each pay.

Multiple Jobs: Which Employer Do You Claim From?

You can only claim the tax-free threshold from one employer — your main or highest-paying job. Here is why this matters:

• If you claim from both jobs, each employer will withhold tax as if you earn less. But your combined income may push you into a higher bracket.
• The result: you will have a tax debt at year end.
• For your second job, answer "No" to the threshold question — your employer will withhold at a higher rate, which is more accurate.

Tax-Free Threshold and Medicare Levy

The Medicare levy (2% of taxable income) is separate from the tax-free threshold. The Medicare levy has its own low-income thresholds:

So even if you earn between $18,200 and $26,000 (and pay no income tax), you still pay a small Medicare levy on the income above the levy threshold.

Tax-Free Threshold and HECS/HELP

HECS/HELP repayments are based on your repayment income, which is independent of the income tax system. In 2025-26, you start repaying HECS when your repayment income exceeds $67,000 — far above the tax-free threshold. Read our HECS repayment guide for details.

Tax-Free Threshold for Part-Year Residents

If you become an Australian tax resident mid-year (e.g., arrived in Australia in January), the ATO still applies the full $18,200 threshold for that year — it is not pro-rated. However, your overseas income may affect your residency status and tax obligations.

What If You Did Not Claim the Threshold?

If you forgot to claim the threshold and your employer withheld too much tax, you will receive a refund when you lodge your annual tax return. You do not permanently lose the benefit — it is reconciled at tax time.

Frequently Asked Questions

Has the tax-free threshold changed for 2025-26?

No. The tax-free threshold has been $18,200 since the 2012-13 financial year. While the Stage 3 tax cuts changed the marginal rates above this threshold, the threshold itself has not moved.

Can pensioners claim the tax-free threshold?

Yes, pensioners and retirees who are Australian tax residents can claim the tax-free threshold. Additionally, the Seniors and Pensioners Tax Offset (SAPTO) provides further reductions for eligible retirees, effectively raising the tax-free amount significantly.

Does the tax-free threshold apply to investment income?

Yes. The threshold applies to all forms of taxable income — wages, salary, rental income, dividends, and capital gains — combined into your total taxable income for the year.

Sources: ATO Low Income Tax Offset · ATO Tax Rates 2025-26 · Last updated: February 2026