Marginal vs effective tax rate in Australia

In Australia, someone on a $90,000 salary in FY 2025-26 has a marginal tax rate of 32% once Medicare is in. They also pay about 21.76% of their salary in tax. Both numbers are correct. They answer different questions, and most Australians confuse the two. This post is for any Australian worker who has seen "marginal rate 30%" in every tax explainer and wants to know which number is theirs, how to compute it themselves, and what the second-bracket rate cut on 1 July 2026 does to the answer.

01Marginal and effective tax rates, with the FY26 brackets.

Your marginal tax rate is the rate the ATO applies to your next dollar of income. Your effective tax rate is the total tax you pay, divided by your total income. The first is a forward-looking decision number. The second is a backward-looking summary. Australia uses a progressive bracket system, so the two are never equal for anyone earning above the tax-free threshold.

The rates above exclude the Medicare levy. Most resident taxpayers pay it at a flat 2% of taxable income. To get the true cost of an extra dollar in your pocket, add 2 to the bracket rate. A 30% bracket marginal cost is 32%. A 37% bracket marginal cost is 39%.

Because lower brackets taxed your earlier dollars at lower rates, the average across all your dollars sits below the bracket you currently sit in. Even at $200,000 income the effective rate is around 30%, not 47%.

02How to calculate your own effective tax rate.

Pick the income. We will use $90,000, which sits in the middle of the 30% bracket and approximates a full-time salary in 2026.

1. The first $18,200 is untaxed. Tax so far: $0.
2. The next $26,800, the band from $18,201 to $45,000, is taxed at 16%. Tax on the band: $4,288.
3. The next $45,000, the band from $45,001 to $90,000, is taxed at 30%. Tax on the band: $13,500.
4. Income tax total: $0 + $4,288 + $13,500 = $17,788.
5. Medicare levy at 2% of $90,000: $1,800. Grand total: $19,588.

Effective rate: $19,588 divided by $90,000 = 21.76%. Marginal rate on the next dollar: 30% plus 2% Medicare = 32%. The gap is 10.24 percentage points.

Skip the arithmetic. Drag the income slider on the income tax calculator on nobsfin and the marginal rate, effective rate, and Medicare levy update live against the full bracket staircase, for any income and any FY.

03Crossing a tax bracket. The myth, the math.

The most common misreading of progressive tax is that crossing a bracket boundary taxes all your income at the higher rate. That is not how it works.

04The second-bracket tax cut on 1 July 2026.

The federal government legislated a two-step reduction of the second bracket as the next phase of the personal income tax cuts. The 16% rate that currently applies to the $18,201 to $45,000 band drops to 15% on 1 July 2026, then to 14% on 1 July 2027. The other four brackets stay put.

Here is what the change does to a $90,000 taxpayer in FY27. The first $18,200 is still untaxed. The $26,800 in the second band is now taxed at 15% instead of 16%, saving $268 of income tax. The 30% band is unchanged. Medicare is unchanged at 2% of taxable income. New total: $19,320, for an effective rate of 21.47%.

05Frequently asked questions.

Is my marginal tax rate the same as my tax bracket?

The bracket is the income band. The marginal rate is the percentage tax applied to dollars inside that band. If your taxable income lands between $45,001 and $135,000 in FY26 you are in the 30% bracket, and your marginal rate on those dollars is 30%, or 32% once Medicare is added. They map to the same number, but the bracket is the band and the rate is the price of being in it.

Does the effective tax rate include the Medicare levy?

It does if you want the real picture. The ATO bracket rates exclude the 2% Medicare levy, so a 30% marginal headline is really 32% out of your pocket on the next dollar. For an effective rate, add the levy to total tax before dividing by income. On $90,000 the effective rate is 19.76% before Medicare and 21.76% after in FY26.

Does moving into a higher bracket reduce my take-home pay?

No. This is a common misconception. Only the dollars above the bracket boundary are taxed at the higher rate. Every dollar below the boundary keeps its lower rate. A $1,000 pay rise that lifts you from $45,000 to $46,000 costs $320 in tax including Medicare, leaving $680 in your pocket. Refusing the raise keeps the bracket and costs you $680.

How do I work out my effective tax rate?

Three steps:

1. Apply each FY26 bracket rate to the slice of income inside that bracket.
2. Add the Medicare levy at 2% of taxable income (most residents).
3. Divide the total by your taxable income. That percentage is your effective rate.