Tax Planning
Preparing for the New Margin Between Tax Rates: Australia’s Income Tax Cuts from 2026–27
Significant tax rate reductions are coming for Australian residents in two stages—are you ready to adjust payrolls, budgets or investment plans?
By NomadicTax Research Team • 5-8 min read • May 3, 2026
## What is changing?
From **1 July 2026**, the personal tax rate for Australian resident individuals on income between the tax-free threshold and $45,000 drops from **16% to 15%**. From **1 July 2027**, that same income bracket’s rate drops further to **14%**. ([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))
At the same time, the Government is raising the Medicare levy low-income thresholds and family thresholds to stay aligned with inflation (CPI), ensuring those on lower incomes are shielded from unnecessary tax/levy burdens. ([ato.gov.au](https://www.ato.gov.au/law/view/document?DocNum=0000081420&FullDocument=true&PiT=99991231235958&utm_source=openai))
These changes are enacted under the *Treasury Laws Amendment (More Cost of Living Relief) Act 2025*, which becomes **law** and begins operation on these dates. ([ato.gov.au](https://www.ato.gov.au/law/view/document?DocNum=0000081420&FullDocument=true&PiT=99991231235958&utm_source=openai))
## Implications for different groups
- **Low-income earners**: Expected to pay no or minimal Medicare levy, full benefit from threshold increases; better take-home pay from July 2026.
- **Middle-income earners** earning just above $18,200 up to $45,000**: biggest percentage benefit initially, especially for those in that bracket—the cut from 16% down to 15% or 14% is relatively large.
- **High-income earners**: On income exceeding $45,000, marginal rates above $45,000 remain at **30%**, 37% and 45% respectively. Benefit only from threshold moves in Medicare levy.
## What you need to do now
1. **Employees & individuals**: Budget your expectations for increased net income from FY 2026-27 onward. Adjust financial plans, deductions, or investment contributions accordingly.
2. **Employers & payroll software providers**: Update payroll tables and software to calculate withholding based on 15% in FY 2026-27 and 14% for FY 2027-28 onward for that bracket.
3. **Financial planners**: Revisit tax-sensitive investments; lower marginal tax for lower-end of taxable incomes could shift decisions over deductions, offsets, or salary packaging.
## Practical example
> **Sarah**, a resident earning $40,000/year:
> In FY 2025-26, she would pay 16% on income over $18,200 (i.e. $21,800 → ≈ $3,488).
> From 1 July 2026, she’ll pay 15% → ≈ $3,270 (saving **$218/year**).
> From 1 July 2027: 14% → ≈ $3,052 (saving **$436/year** vs pre-reduction).
## Actionable takeaways
- Review your withholding allowances now to ensure optimal take-home pay starting FY 2026-27.
- Speak to your employer or accountant to confirm payroll systems will adopt new thresholds and rates in time.
- Consider whether salary sacrifice or pre-tax benefits still make sense under adjusted rates.
**Bottom line:** These cuts reduce the burden for many Australians, especially those on lower to modest incomes. But the changes also require proactive adjustments from both individuals and employers to ensure compliance and maximise benefits.