Tax for Australians · PUBLISHED 04 JUL 2026 · VERIFIED 04 JUL 2026 · AU EDITION

SOPHIE EXPLAINS: Your 2025-26 Tax Return Still Uses the 16% Rate ($268 More)

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If you lodge a 2025–26 tax return on a $90,000 salary, you’ll be taxed using the old 16% bracket, paying about $268 more than you would if the new 15% rate starting 1 July 2026 applied to that same income.

The number that matters

$268 / year — tax cut per taxpayer from 1 July 2026 From 1 July 2026, the marginal tax rate on income between $18,201 and $45,000 drops from 16% to 15%, delivering a tax saving of up to $268 per year for individuals earning $45,000 or more, relative to the 2024–25 tax settings.

How it quietly costs you

Mechanism: Tax years vs budget announcements

• Australia’s income tax is assessed by financial year, running from 1 July to 30 June.
• The “2026 tax cuts” announced in the 2025–26 and 2026–27 Federal Budgets start from 1 July 2026, which is the 2026–27 financial year, not the year you’re lodging the return for.
• The tax return most people lodge in calendar 2026 is for income earned 1 July 2025 – 30 June 2026, which still uses the old Stage 3 framework with a 16% rate on $18,201–$45,000.

What rates actually apply to your 2025–26 return (year ending 30 June 2026)

For Australian residents, official 2025–26 income tax brackets (excluding Medicare) are:

• $0 – $18,200: 0% (tax-free threshold)
• $18,201 – $45,000: 16% on each $1 over $18,200
• $45,001 – $135,000: $4,288 plus 30% of each $1 over $45,000
• $135,001 – $190,000: $31,288 plus 37% of each $1 over $135,000
• $190,001 and over: $51,638 plus 45% of each $1 over $190,000

The Medicare Levy of 2% of taxable income generally applies once a single person’s income reaches $34,027 in 2025–26.

Impact: What you miss out on in 2025–26

The 2026–27 Budget confirms that from 1 July 2026 (2026–27 year), the 16% marginal rate on $18,201–$45,000 falls to 15%, giving up to $268 per year in tax cuts compared to 2024–25 settings.

Because the cut only starts after 30 June 2026:

• A worker on $60,000 in 2025–26:
• Pays 16% on the slice $18,201–$45,000 in their 2025–26 return.
• If the 15% rate applied instead, they would pay about $268 less tax on that bracket.

Old vs better comparison (bracket only)

For income between $18,201 and $45,000:

• Old rate (used in your 2025–26 return): 16%
• Better 2026–27 rate: 15%
• Projected 2027–28 rate: 14%

On a full $26,800 of income in that bracket (from $18,201 to $45,000):

• Tax at 16%: about $4,288
• Tax at 15%: about $4,020 (a saving of $268) from 1 July 2026.
• Tax at 14%: about $3,752 (a total saving of $536 vs 16%).

The second, compounding trap

Mechanism: Future offsets and instant deductions don’t apply yet

The 2026–27 and 2027–28 Budgets introduce new relief that only applies from later years, but many taxpayers assume it affects the return they’re lodging now:

• From 2027–28, the Working Australians Tax Offset (WATO) becomes a permanent offset of up to $250 per year, increasing the effective tax‑free threshold for workers by nearly $1,800 to $19,985 (or up to $24,985 for those also eligible for the Low Income Tax Offset).
• From 2026–27, there is a $1,000 instant tax deduction for work‑related expenses, expected to benefit 6.2 million workers (about 42% of taxpayers) with an average tax saving of $205 in 2026–27.

Neither WATO nor the $1,000 instant deduction applies to your 2025–26 tax return:

• WATO starts in the 2027–28 income year.
• The $1,000 instant deduction begins in the 2026–27 income year.

Impact: missed relief if you assume “2026 changes” apply now

For a typical full‑time worker lodging their 2025–26 return:

• They do not get:
• The $268 tax cut from the lower 15% rate (that starts from 1 July 2026).
• The average $205 saving from the $1,000 instant deduction, which only applies from 2026–27.
• The up to $250 WATO increasing their effective tax‑free threshold from 2027–28.

Long‑run cost of misunderstanding timing (illustrative):

• A worker on average earnings (Treasury uses average earnings to model the combined benefit) could receive up to $2,816 per year in tax cuts from the full package of changes relative to 2023–24 settings once all five cuts are in place.
• If they assume that “it’s already fixed in 2026”, they may:
• Fail to budget for higher‑than‑expected tax bills in 2025–26.
• Delay adjusting their withholding or saving rates, potentially leading to hundreds of dollars in payable tax at lodgment instead of a refund.

While the ATO does update withholding tax tables from 1 July 2026 to reflect the new rates, any misunderstanding of which year the cuts apply to can still leave households short hundreds of dollars when their 2025–26 return is assessed.

What this looks like in practice

Persona

• Name: Emily
• Age: 32
• Job: Marketing coordinator in Sydney
• Income (2025–26): $80,000 salary
• Fund/account type: Employer superannuation with 12.0% Superannuation Guarantee in 2025–26 (that’s $9,600 contributed by her employer).
• Years to retirement target: 33 years (aiming for age 65)

Discovery 1 — Her “2026” pay is still taxed at 16% on the first bracket

When Emily checks the current resident tax rates for the year ending 30 June 2026, she finds:

• Income $18,201–$45,000 is taxed at 16%, not 15%.
• On that bracket (a $26,800 slice of her income), that equates to about $4,288 in tax.

Comparing to the announced post‑1 July 2026 rate of 15%, she realises that same slice will only cost $4,020, saving $268 per year from 2026–27 onwards.

Discovery 2 — The big “cost‑of‑living” offsets don’t apply to the return she’s lodging

Reading the Budget 2026–27 material, Emily sees:

• Working Australians Tax Offset (WATO):

• Up to $250 per year for over 13 million workers from the 2027–28 income year.

• Raises her effective tax‑free threshold by nearly $1,800 to $19,985 if she’s a worker.

• $1,000 instant tax deduction:

• Available from 2026–27, expected to benefit 6.2 million workers (42% of taxpayers) with an average tax saving of about $205 in 2026–27.

She discovers that none of this applies to the 2025–26 return she’s lodging now, so any expectation of $455+ in combined relief ($250 offset + $205 average deduction benefit) is premature.

Discovery 3 — Her Medicare Levy still bites at 2% on most of her income

From current thresholds, Emily confirms:

• Once a single person’s income reaches $34,027, the full 2% Medicare Levy applies on taxable income.
• On her $80,000 taxable income, that’s an extra $1,600 in levy (2% of $80,000), on top of ordinary income tax and before any offsets or deductions.

Compared to the impression that “tax is going down across the board”, she realises that for 2025–26 she still pays the full 2% levy and old marginal rates, meaning no visible cut yet in her total effective tax rate.

The full cost of doing nothing

For someone like Emily on $80,000, the combined impact of Problem 1 and Problem 2 over the transition years looks like this:

Modelling basis (per year, relative to fully implemented changes):

• Bracket reduction (Problem 1):

• Difference between 16% and 15% on $26,800 in the 2025–26 year = $268 extra tax compared with the post‑1 July 2026 setting.

• Offsets and instant deduction (Problem 2):

• No access in 2025–26 to:

• Up to $250 WATO from 2027–28.

• Average $205 saving from the $1,000 instant deduction from 2026–27.

If she simply assumes the 2026 changes already apply and doesn’t plan for the reality:

• 2025–26:
• Pays $268 more than the future 15% rate would imply, plus misses $205 of average instant deduction savings and up to $250 of WATO that only arrive later.
• The “gap” between her expectation and reality is roughly $723 ($268 + $205 + $250) of relief she doesn’t yet receive.

Over the three transition years (2025–26, 2026–27, 2027–28), misunderstanding timing and not adjusting expectations could easily translate into over $1,000 worth of mis‑budgeted tax and levy, even though the underlying changes are positive longer term. This figure is based on summing one year of missed bracket relief ($268) plus one year of missed average instant deduction relief ($205) and one year before the full WATO is in effect (up to $250).

What to do about it

Move 1 — Check which rates apply to YOUR 2025–26 income

1. Action: Confirm your actual tax rates and bands for the year ending 30 June 2026.
2. Tool/portal: ATO “Tax rates – Australian resident” page and the ATO tax tables overview.
3. Steps:

• Go to the ATO’s tax rates section and select the 2025–26 income year for Australian residents.
• Identify which bracket your taxable income (from your latest payslip or employer summary) sits in and note the marginal rate (e.g. 16% for $18,201–$45,000).
• Cross‑check against the tax tables updated from 1 July 2026 to see how the rate will change in the next financial year, not the current return.

4. What “good” looks like: You clearly know that your 2025–26 return uses the 16% bracket, and you treat any 15%/14% figures as applying only from 1 July 2026 / 1 July 2027 onward.

Move 2 — Use myGov/ATO online to see your real withholding vs expected tax

1. Action: Compare your PAYG withholding to your expected tax so you’re not surprised at lodgment.
2. Tool/portal: myGov account linked to ATO Online Services.
3. Steps:

• Log into myGov, go to ATO Online, and view your income statements (formerly payment summaries).
• Note your year‑to‑date gross income and tax withheld for 2025–26.
• Use the official 2025–26 resident tax rate tables (plus the 2% Medicare Levy if your income is above $34,027) to estimate your tax liability, then compare it with your withheld amount.

4. What “good” looks like: Your PAYG withholding is close to what the 2025–26 tables imply; if there’s a large shortfall, you adjust expectations now instead of assuming “new 2026 cuts” will remove your bill.

Move 3 — Map when WATO and the instant deduction start for you

1. Action: Identify the first return where you’ll actually benefit from WATO and the $1,000 instant deduction.
2. Tool/portal: Budget 2026–27 and 2027–28 tax measures via Treasury/official Budget documents.
3. Steps:

• Look up the Budget measures for personal income tax and find the start dates: $1,000 instant deduction from the 2026–27 income year, WATO from 2027–28.
• Write down which tax return year corresponds to those income years (e.g. the 2026–27 income year is the return lodged around mid‑2027).
• Adjust your household budget to reflect that these benefits do not reduce your 2025–26 tax bill, but start one or two years later.

4. What “good” looks like: You have a clear timeline: no WATO or instant deduction on the 2025–26 return, instant deduction on 2026–27, WATO from 2027–28, so your expectations for refunds or payable amounts align with actual law.

A myth worth clearing up

Myth: “The 2026 tax cuts mean my 2026 tax return will be on the new lower rates.”

Fact: The cuts starting 1 July 2026 apply to income earned in the 2026–27 year, not to the 2025–26 income year return you lodge around 2026. The 16% marginal rate on $18,201–$45,000 still applies for the year ending 30 June 2026, with the drop to 15% only applying from the 2026–27 year and then to 14% from 2027–28.

Sources

• https://budget.gov.au/content/02-cost-of-living.htm
• https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents
• https://treasury.gov.au/policy-topics/taxation/budget2026-27
• https://www.ato.gov.au/tax-rates-and-codes/tax-tables-overview

Researched 2026-07-04.

Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.