The Truth About Moving Into a Higher Tax Bracket, You Only Pay More on the Extra Income
If you’ve ever worried that getting a pay rise or earning extra income might leave you “worse off” because you’ll be pushed into a higher tax bracket, you’re not alone. This is one of the most common misconceptions about how tax brackets work in Australia. The good news? Moving up a tax bracket does not mean all your income gets taxed at the higher rate. Only the portion that falls into the higher bracket does.
In this article, we’ll demystify the Australian tax bracket system, break down common myths, and show you exactly how it affects your take-home pay.
Understanding How Australian Tax Brackets Work
What Are Tax Brackets?
Australia uses a progressive income tax system, meaning the more you earn, the higher the percentage you pay,but only on the income above certain thresholds. These thresholds are called tax brackets.
The Current Australian Tax Rates (2024-25)
| Taxable Income | Tax Rate |
| $0 – $18,200 | Nil (Tax-free threshold) |
| $18,201 – $45,000 | 19% |
| $45,001 – $120,000 | 32.5% |
| $120,001 – $180,000 | 37% |
| $180,001 and above | 45% |
Progressive Tax Explained
In a progressive system, you don’t pay a flat rate on your entire income. Instead, you pay different rates on different portions of your income.
For example, if you earn $50,000:
- The first $18,200 is taxed at 0%.
- The next $26,800 (from $18,201 to $45,000) is taxed at 19%.
- The remaining $5,000 (from $45,001 to $50,000) is taxed at 32.5%.
So, only the $5,000 is taxed at 32.5% ,not your entire $50,000.
The Most Common Misconception: “I’ll Lose Money If I Move Up a Bracket”
Why This Fear Exists
It’s understandable why people think moving up a bracket is bad. If you hear your tax rate is increasing from 32.5% to 37%, it sounds like you might take home less.
Why It’s Incorrect
In reality, only the income above the threshold is taxed at the higher rate. If you earn $121,000, only $1,000 is taxed at 37%. The first $120,000 is still taxed at the lower rates.
A Simple Example
Imagine you get a raise from $120,000 to $121,000:
- Only $1,000 is taxed at 37%.
- The extra tax you’ll pay on that $1,000 is $370.
- You still take home most of that raise.
So, you will never be worse off for earning more.
How Tax Brackets Affect Your Take-Home Pay
Calculating Take-Home Pay Step-by-Step
Using our $121,000 example:
- First $18,200 taxed at 0% = $0 tax.
- $18,201 to $45,000 taxed at 19% = $5,092.
- $45,001 to $120,000 taxed at 32.5% = $24,375.
- $1,000 taxed at 37% = $370.
Total tax: $29,837.
So, your after-tax income is $121,000 – $29,837 = $91,163.
Your raise still gives you extra cash in your pocket, just with part of it taxed at a higher rate.
Why Tax Brackets Are Designed This Way
The Logic Behind Progressive Taxation
Australia’s system is designed to be fair, ensuring higher earners contribute more without punishing them for earning extra.
This system:
- Helps fund essential public services.
- Reduces inequality.
- Avoids sudden drops in take-home pay when someone earns just a little more.
Related Concepts to Understand
Marginal Tax Rate vs. Average Tax Rate
- Marginal Tax Rate: The rate applied to your next dollar earned.
- Average Tax Rate: Your total tax divided by your total income.
Most people confuse these. While your marginal rate may be 37%, your average rate might only be around 24%.
Medicare Levy
On top of income tax, most Australians also pay the Medicare Levy (usually 2% of your taxable income). This is often overlooked but is important when calculating your true take-home pay.
Conclusion: Don’t Fear Higher Brackets
The bottom line is this: moving into a higher tax bracket never makes you poorer. Only the extra portion of income is taxed at the higher rate.
Understanding how tax brackets work helps you make informed decisions about pay rises, bonuses, and even business income. You can safely accept that promotion or side hustle knowing that you will still come out ahead.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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