Tax Planning
Stage-by-Stage: Australia’s Personal Income Tax Cuts & What They Mean for Small Earners
Australia’s 2025-26 Budget will reduce the bottom tax bracket rate from 16% to 14% by 2027—practical guidance for low- and middle-income earners to make the most of the change.
By NomadicTax Research Team • 5-8 min read • March 15, 2026
## 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](https://www.ashurst.com/en/insights/australia-federal-budget-2025-2026-key-tax-measures/?utm_source=openai))
- From **1 July 2027 onwards**, further reduced to **14%**. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-307bd737-ce3a-4500-8a3d-77b5fd2a774a?utm_source=openai))
Additional changes include indexing of the Medicare levy low-income thresholds to relieve cost-of-living pressures. ([ashurst.com](https://www.ashurst.com/en/insights/australia-federal-budget-2025-2026-key-tax-measures/?utm_source=openai))
## 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.