Tax Threshold 2025-26: Understanding the Tax-Free Threshold and LITO

Understanding Australia's tax thresholds is essential for every worker. For the 2025-26 financial year, the tax-free threshold remains at $18,200, meaning you can earn this amount without paying any income tax. Combined with the Low Income Tax Offset (LITO), many Australians can earn even more while keeping their tax bill minimal. In this guide, we'll break down everything you need to know about tax thresholds for 2025-26.

What Is the Tax-Free Threshold?

The tax-free threshold is the amount of income you can earn each financial year without having to pay income tax. For the 2025-26 financial year, this threshold is set at $18,200. This means if your total taxable income is $18,200 or less, you won't pay any income tax at all. This is a significant benefit for part-time workers, students, and those just starting their careers.

When you start a new job, your employer will ask you to complete a Tax File Number (TFN) declaration form. On this form, you need to indicate whether you want to claim the tax-free threshold. If you're only working one job, it's usually best to claim it, as this tells your employer to not withhold tax from the first $18,200 of your annual income. To understand how this affects your regular pay, check out our take-home pay calculator, which shows exactly how much money you'll receive after tax.

2025-26 Income Tax Rates and Thresholds

Australia's income tax system uses a progressive scale, meaning the more you earn, the higher percentage of tax you pay on each additional dollar. The tax rates for Australian residents for the 2025-26 financial year are structured across several brackets, with the tax-free threshold at the bottom.

The following table shows the complete breakdown of the 2025-26 tax brackets. These rates apply to Australian residents and do not include the Medicare levy, which is an additional charge. For more details on how income tax works, visit our income tax guide.

Note: These rates do not include the Medicare levy of 2% or the Medicare levy surcharge. Learn more about the Medicare levy and how it affects your take-home pay.

Understanding the Low Income Tax Offset (LITO)

The Low Income Tax Offset (LITO) is a tax rebate designed to help low-income earners reduce their tax bill. For the 2025-26 financial year, LITO provides up to $700 in tax relief for eligible taxpayers. This means that even if you earn above the tax-free threshold, you may still pay little or no tax thanks to this offset.

LITO works by reducing the amount of tax you owe after your tax has been calculated. If the offset reduces your tax to zero and there's still some offset remaining, you unfortunately cannot receive the excess as a refund – it simply brings your tax liability down to zero. The offset phases out gradually as your income increases, meaning higher earners receive a smaller benefit until it disappears entirely.

How LITO Works in 2025-26

The Low Income Tax Offset for 2025-26 follows a specific structure based on your taxable income. If you earn $37,500 or less, you'll receive the maximum offset of $700. Between $37,501 and $45,000, the offset gradually reduces by 5 cents for every dollar you earn above $37,500. Then, between $45,001 and $66,667, it continues to reduce at a rate of 1.5 cents for every dollar above $45,000 until it reaches zero.

Let's look at some practical examples. If you earn $25,000 in 2025-26, you would normally pay tax on the amount above $18,200 (which is $6,800 at 16% = $1,088). However, with the full LITO of $700, your actual tax bill drops to just $388. This demonstrates how powerful the combination of the tax-free threshold and LITO can be for low-income earners.

Claiming the Tax-Free Threshold: What You Need to Know

When you claim the tax-free threshold, your employer calculates your tax as if you'll earn the same amount every week for the entire financial year. This means they spread the $18,200 threshold across 52 weeks (or 26 fortnights), giving you approximately $350 tax-free per week or $700 per fortnight. This is why you might notice that tax starts being withheld once your weekly earnings exceed these amounts, even if you haven't actually earned $18,200 yet.

If you work multiple jobs, you should generally only claim the tax-free threshold from your main employer (the one who pays you the most). If you claim it from multiple employers, you might not have enough tax withheld throughout the year and could end up with a tax bill when you lodge your return. For those with HECS-HELP debts, remember that repayments kick in once your income exceeds the compulsory repayment threshold, which is separate from the tax-free threshold.

Tax Thresholds and Superannuation

It's important to understand how the tax-free threshold interacts with your superannuation. Employer super contributions are not counted towards your taxable income for income tax purposes, as they are paid separately into your super fund. However, contributions are generally taxed at 15% within the super fund itself (up to the concessional contributions cap).

If you're considering salary sacrifice arrangements to boost your super, remember that these contributions reduce your taxable income. This can be a useful strategy if you're earning just above a tax bracket threshold, as it may bring you back into a lower bracket. You can learn more about how super works and its tax treatment on our superannuation page.

Summary and Key Takeaways

The 2025-26 tax thresholds provide significant relief for low and middle-income earners in Australia. With a tax-free threshold of $18,200 and the Low Income Tax Offset providing up to $700 in additional relief, many Australians can earn a modest income while paying minimal or no income tax. Understanding these thresholds helps you plan your finances, decide whether to claim the tax-free threshold from your employer, and estimate your annual tax liability.

Remember that tax laws can change, and individual circumstances vary. If you have complex tax situations, multiple income sources, or are unsure about your eligibility for offsets, consider consulting a registered tax agent. For quick estimates of your take-home pay and tax obligations, use our online calculators to see exactly how these thresholds apply to your specific situation.