Tax Planning
Leveraging the New Cost-of-Living Tax Cuts: Practical Insights for Employees and Sole Traders
From 1 July 2026 the first marginal tax rate drops, with further relief coming in 2027. Here's how employees and sole traders can maximise these changes.
By NomadicTax Research Team • 5-8 min read • May 21, 2026
## Overview of the Tax Cuts
Under the **Treasury Laws Amendment (More Cost of Living Relief) Act 2025**, the 2025–26 Federal Budget introduced new tax cuts which are **now law**, taking effect **1 July 2026**. The **16% marginal rate** on taxable income between **AU$18,200 and $45,000** will fall to **15%** in 2026-27, and then to **14%** in 2027-28 and later years. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/personal-income-tax-new-tax-cuts-for-every-australian-taxpayer?utm_source=openai))
Additionally, **Medicare levy low-income thresholds** and thresholds for **Senior Australians and Pensioners Tax Offset (SAPTO)** are being increased in line with CPI from income year 2024-25 onward to ensure that low-income Australians don't lose relief due to bracket creep. ([ato.gov.au](https://www.ato.gov.au/law/view/document?DocNum=0000081420&FullDocument=true&PiT=99991231235958&utm_source=openai))
## Who Benefits Most?
- **Employees** earning in the range between $18,201 and $45,000 will enjoy immediate reduction in marginal tax for that bracket from 16% to **15%** in 2026-27.
- **Sole traders and small business owners** who draw that income will similarly benefit.
- **Low income earners**, seniors, and pensioners benefit from increased threshold levels, possibly with reduced or no Medicare levy liability.
## Tax Planning Implications
- For the **2025-26 financial year**, assess whether some income can be managed into 2026-27 where lower rates apply. However, timing and cash-flow matter.
- For those close to the top of the 16% bracket, additional income or prepayments might push you into higher rates; anticipate liability.
- Review **pre-tax deductions**, salary packaging and concessional super contributions to reduce taxable income within taxed brackets.
## Example Scenario
**Michael**, an employee earning $40,000 a year, currently pays 16% on income above $18,200 (≈$21,800). Starting 1 July 2026, that same portion will be taxed at 15%. If his income remains unchanged, he'll save around **AU$218 per annum** in tax for that bracket (assuming ~$21,800 taxed at 16% vs 15%). Further savings will come in 2027-28 when rate drops to 14%.
## Key Steps to Take
1. **Project your income** for 2026-27 — consider side gigs, bonuses, business income.
2. **Adjust PAYG withholding** if needed — employees may need to review withholding rates to reflect lower bracket rates.
3. For **sole traders**, ensure estimated tax payments are recalculated with new rates.
4. Investigate **pre-year-end income shifts**, such as delaying invoice issuance or bringing deductible expenses forward where possible.
5. Keep updated with the ATO and Treasury to monitor final rules around implementation.
These cost-of-living tax cuts are amongst the most direct recent reforms to impact everyday Australians. With early awareness, you can maximise savings and ensure a smoother tax year ahead.