Tax-Free Threshold in Australia: What It Is and Whether to Claim It
By Kaleem UlahLast Updated: June 25, 2026|11 min read
QUICK ANSWER
The tax-free threshold is: $18,200. This is the amount of income you can earn each financial year before paying any income tax.
Should you claim it? YES if this is your main or only job and you are an Australian resident.
Multiple jobs: claim only at your main (highest-paid) job. Do NOT claim a second or additional job.
Foreign residents and working holiday makers: cannot claim the tax-free threshold. Different tax rates apply.
The tax-free threshold is one of Australia’s most frequently misunderstood tax concepts, not because it’s complex, but because it comes with a form (the Tax File Number declaration or Withholding Declaration), and the form asks whether you want to claim it without always making clear what happens if you say yes or no. This guide answers the questions behind the question.
What Is the Tax-Free Threshold?
The tax-free threshold is the amount of income an Australian resident individual can earn in a financial year before paying income tax. For the 2025-26 financial year, the threshold is $18,200. Income below this amount is taxed at 0%.
The threshold has been at $18,200 since the 2012-13 financial year. It has not changed since.
When you start a new job, your employer asks you to complete a Tax File Number Declaration (or an equivalent withholding declaration). One question is whether you want to claim the tax-free threshold with this employer. Your answer determines how much tax your employer will withhold from your pay throughout the year.
Should I Claim the Tax-Free Threshold?
This is the question most people actually have. The short answer is yes, claim it at your main job. The detailed answer depends on your situation:
| Your Situation | Claim? | Why |
|---|---|---|
| One job, Australian resident | YES | Claim from your employer. You receive the $18,200 tax-free band against this income. |
| Multiple jobs at your main (highest paid) job | YES | Claim at the primary employer only. You get one tax-free threshold regardless of how many jobs you hold. |
| Multiple jobs at a second or additional job | NO | Do NOT claim a second job. Tax is withheld as if this were your only income, resulting in massive under-withholding. You will owe a lump sum at tax time. |
| Australian resident but earning less than $18,200 total from all sources | YES | Claim it. If you earn under $18,200 total, no income tax will be payable. Claiming the threshold ensures your employer withholds little or no tax. |
| Foreign resident for Australian tax purposes | NO | The tax-free threshold does not apply to foreign residents. Foreign residents are taxed on the first dollar at 30% on income up to $135,000. |
| Working holiday visa holder (subclass 417 or 462) | NO | Working holiday makers are a separate tax category and cannot claim the standard tax-free threshold. They are taxed at 15% on the first $45,000. |
| You arrived in Australia partway through the year (part-year resident) | YES (reduced amount) | Claim it, but the threshold is reduced to reflect the months you were an Australian resident. A separate part-year threshold calculation applies. |
| You left Australia permanently partway through the year | YES (for the resident period) | Claim for the period you were an Australian resident. The ATO calculates the part-year threshold in your final return. |
The key rule: You can only claim the tax-free threshold at one employer at a time. You get one threshold of $18,200 per year it does not multiply across multiple jobs. If you claim it at two jobs simultaneously, each employer will withhold tax as if the first $18,200 of your income is tax-free, effectively halving the withholding on your combined income. You will owe the difference at tax time.
What Happens If You Don’t Claim the Tax-Free Threshold?
If you do not claim the threshold at your main job, your employer withholds tax as if you have no tax-free threshold at higher rates from the first dollar of income. You will almost certainly be over-withheld throughout the year, and the ATO will refund the over-withheld amount when you lodge your tax return.
There is no penalty for not claiming the threshold. The practical consequence is just a lower take-home pay throughout the year, with a larger refund at tax time. If you prefer receiving a regular refund at tax time (some people do), not claiming is one way to achieve this but it is essentially a zero-interest loan to the ATO.
If you have not claimed the threshold and want to change this, you can give your employer an updated Withholding Declaration at any time during the year.
What Happens If You Claim the Threshold at Two Jobs?
This is one of the most common tax mistakes in Australia, and it creates a tax debt at year-end rather than a refund.
Example: You earn $30,000 at Job A (claim threshold) and $20,000 at Job B (also claim threshold). Job A withholds tax on income above $18,200. Job B also withholds tax on income above $18,200 as if the first $18,200 from Job B is also tax-free. But your combined income is $50,000. You have effectively had no tax withheld on $36,400 of your combined income when only $18,200 should be tax-free. The ATO will assess your return at the correct rate on $50,000 total and you will owe the underpaid tax.
If you have two jobs and are unsure whether you have claimed the threshold correctly, check with your tax agent before lodging your return so any underpayment can be managed.
The Tax-Free Threshold and Tax Brackets: 2025-26
The threshold is the starting point of Australia’s progressive tax scale. Once income exceeds $18,200, each additional dollar is taxed at the applicable marginal rate:
| Taxable Income | Tax Rate | Notes |
|---|---|---|
| $0 to $18,200 | 0% | The tax-free threshold. No income tax on this amount. |
| $18,201 to $45,000 | 16% | On the amount over $18,200. Note: tax on $45,000 total income = $4,288 (not 16% of $45,000). |
| $45,001 to $135,000 | 30% | On the amount over $45,000. |
| $135,001 to $190,000 | 37% | On the amount over $135,000. |
| Above $190,000 | 45% | On the amount over $190,000. |
| Medicare Levy | +2% | Added on top of income tax for most Australian residents (above the low-income threshold). Low-income earners may have the levy reduced or waived. |
These rates are for Australian residents. Foreign residents pay different rates with no tax-free threshold (taxed at 30% on the first dollar). Working holiday makers have their own rate (15% up to $45,000).
The Low Income Tax Offset (LITO): The Effective Tax-Free Threshold
While the official tax-free threshold is $18,200, the Low Income Tax Offset (LITO) effectively raises the tax-free amount higher for people on lower incomes. LITO reduces the income tax calculated on your return. It is not a deduction but a direct reduction in the tax you owe:
| Income Range | LITO Amount | Effect |
|---|---|---|
| $18,201 to $37,500 | $700 | Full LITO. At $25,000 income: income tax is $1,088 minus $700 LITO = $388 net tax. LITO effectively raises the tax-free amount closer to $22,575. |
| $37,501 to $45,000 | $700 reducing | LITO reduces by 5 cents for every dollar over $37,500. |
| $45,001 to $66,667 | Reducing | LITO reduces by 1.5 cents for every dollar over $45,000. |
| Above $66,667 | $0 | LITO is fully phased out above $66,667. |
Practically: if you earn $22,000 per year, your income tax on $3,800 (the income above $18,200) at 16% = $608. The LITO of $700 exceeds this. You pay $0 income tax. The effective tax-free threshold with LITO is approximately $18,200 to $22,575, depending on your income. The LITO reduces, but does not eliminate, tax once income exceeds $37,500.
Note: The Medicare Levy Reduction applies separately. If your income is below approximately $26,000 (for singles, 2025-26), you may be entitled to a full or partial exemption from the 2% Medicare Levy. The exact threshold is adjusted annually. Check your Notice of Assessment or ask your tax agent.
Tax-Free Threshold for Newcomers to Australia (Part-Year Residents)
If you arrived in Australia and became a resident for tax purposes partway through the financial year (1 July to 30 June), your tax-free threshold is proportional to the number of months you were a resident. This is called the part-year tax-free threshold.
Example: You arrived in Australia on 1 January 2026 (six months into the financial year). Your part-year threshold for 2025-26 is approximately: ($18,200 x 6/12) + ($18,200 x 6/12 x certain adjustments). The ATO automatically calculates this on your tax return using your arrival date. Your tax agent will ensure the correct threshold applies.
Similarly, if you left Australia permanently partway through the year and ceased to be a resident, a part-year calculation applies for the period you were a resident.
How the Tax-Free Threshold Works on Your Tax Return
When you lodge your tax return, the ATO calculates your tax on total annual income, applies the tax-free threshold ($0 tax on the first $18,200), applies LITO, and then compares the result to the total PAYG withholding deducted by your employer. If your employer withheld more than your actual tax, you receive a refund. If less, you pay the balance.
The ATO automatically applies the threshold to your return; you do not need to manually calculate it. The relevant question on your tax return is confirming your residency status, which determines whether you are entitled to the threshold at all.
For a complete guide to lodging your individual tax return, see our individual tax return service, or use our tax return checklist to prepare your documents.
Frequently Asked Questions
Kaleem Ulah
Kaleem is CEO & Author at "The Kalculators". With more than 10 years of experience in financial services, he built Kalculators to transform your financial challenges into strategic triumphs!
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