What’s changing?
The Australian Government’s 2025-26 Federal Budget includes tax cuts affecting the lowest tax bracket (for income between A$18,201 and A$45,000):
- From 1 July 2026, the rate will drop from 16% to 15% on this bracket. (ashurst.com)
- From 1 July 2027 onwards, further reduced to 14%. (ato.gov.au)
Additional changes include indexing of the Medicare levy low-income thresholds to relieve cost-of-living pressures. (ashurst.com)
Who benefits most?
| Taxpayer type | Expected gain | Timeline |
|---|---|---|
| Employees earning ~A$25,000-$45,000 annually | Moderate savings (hundreds of dollars per year once fully effective) | from 1 July 2026 / 2027 |
| People below or near current Medicare levy threshold | Relief via updated thresholds and reduced effective tax and levy combinedness | 1 July 2026 |
| Higher income earners (above A$45,000) | No change to marginal rates beyond that bracket; benefits limited via threshold adjustments | no direct effect beyond bottom rate reduction |
What you should do now
- Estimate your tax for FY2026-27: If your income falls in that bottom bracket, calculate tax under both 16%, 15%, and later 14% to understand year-on-year savings.
- Check withholding setup with employer: As rates change, employers will adjust withholding tables. You may want to update your projected tax obligations.
- Plan possible increases in deductions or offsets: With lower marginal rate, there’s more incentive to maximize deductions (e.g., work-from-home, donations), especially in lower income brackets.
- Keep an eye on cash flow: Especially for those paid fortnightly/monthly—budgeting will change slightly once the revised rates take effect.
Example scenario
Sarah earns A$40,000/year:
- Under current rate (16%): tax payable on bracket = (40,000 − 18,200) × 16% = A$3,459
- From 1 July 2026 (15%): tax = (40,000 − 18,200) × 15% = A$3,270, saving A$189
- From 1 July 2027 (14%): tax = (40,000 − 18,200) × 14% = A$3,081, cumulative savings A$378 vs pre-change rate.
Outside this bracket, gains are less direct. For business owners, or those reliant on investment incomes, changes to threshold indexing may have modest effects.
Strategic taxpayer decisions
- If considering additional income (like overtime or side gigs), the effective tax drag in the first bracket decreases—such income becomes more profitable from mid-2026 onwards.
- If you're near the threshold for other tax offsets or levies, updated Medicare levy thresholds may shift your eligibility status.
- Keep updated with ATO notices on withholding schedules to avoid under- or over-payments.
Bottom line: These cuts are aimed squarely at helping lower & middle income earners. Plan ahead, estimate the savings, and don’t miss adjustments to withholding and Medicare levy thresholds that affect your net income.