The tax-free threshold is $18,200. If you’re an Australian resident for tax purposes, you pay no income tax on the first $18,200 you earn in a financial year. You claim it through the tax file number (TFN) declaration you give your employer.
That’s the easy part. The trouble starts when you add a second job, a side hustle or a change in residency. Get the setup wrong and a surprise tax bill can land months later.
This guide explains how the threshold works, the 2026-27 tax rates, how to claim it, and the mistakes we see most often with Sydney workers and small business owners.
What is the tax-free threshold?
The tax-free threshold is the first $18,200 of taxable income you earn each financial year (1 July to 30 June) that isn’t taxed. It applies to Australian residents for tax purposes.
You only pay tax on the income above it, not on your whole income.
Say you earn $26,000. The first $18,200 is tax-free. The remaining $7,800 is taxed at 15%, which comes to $1,170 before offsets and the Medicare levy.
The threshold has sat at $18,200 since 2012-13, and it’s unchanged for 2026-27.
What are the tax rates for 2026-27?
From 1 July 2026, Australian residents pay tax at these rates:
| Taxable income | Tax on this income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 15c for each $1 over $18,200 |
| $45,001 – $135,000 | $4,020 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | $31,020 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,370 plus 45c for each $1 over $190,000 |
These rates don’t include the 2% Medicare levy. One rate changed this year. The 16% rate on income between $18,201 and $45,000 dropped to 15% on 1 July 2026. It’s scheduled to fall to 14% from 1 July 2027. Tax rates can change, so check the ATO website before you rely on any figure.
Is $18,200 really where you start paying tax?
For many people, tax starts a bit later. The Low Income Tax Offset (LITO) reduces your tax by up to $700 if your income is low enough. The ATO applies it automatically when you lodge your return.
In practice, that can push the point where you owe tax to roughly $22,800. The Medicare levy also has low-income relief, so some people pay less than the full 2%.
The $18,200 figure is the legal threshold. Your real position depends on your total income and any offsets.
How does the threshold show up in your pay?
Your employer spreads it across the year. You don’t get $18,200 up front.
Spread evenly, $18,200 works out to about $350 a week, $700 a fortnight or $1,517 a month. Those figures are only the equivalents of the annual threshold. In practice, for 2026-27 employers generally start withholding tax once your pay goes above $363 a week, $726 a fortnight or $1,573 a month. Your employer uses the ATO’s withholding tables to work out how much tax to take from each pay.
That’s why the answer you give on your TFN declaration matters. It decides which column of the tax table your employer uses.
How do you claim the tax-free threshold?
You claim it on your TFN declaration when you start a new job. Employees normally complete it through their employer’s onboarding system or on a paper form. myGov is generally used to view the TFN declaration details your employer has reported.
The form asks whether you want to claim the tax-free threshold from this payer. Here’s how to answer.
Answer Yes if:
- You’re an Australian resident for tax purposes, and
- This is your only job, or your highest-paying one.
Answer No if:
- You already claim it from another payer, or
- You’re a foreign resident for tax purposes.
A “payer” isn’t only an employer. Centrelink and other payers count as well. If you receive taxable payments from more than one source, only one of them should carry the threshold.
Why does a second job cause tax bills?
The $18,200 is one allowance per person per year, not one per job. Employees should generally claim the tax-free threshold from one employer only, usually the employer paying the highest wage, and answer No at the others. Claiming it from multiple employers may result in insufficient tax being withheld.
Here’s a simplified example. It ignores the Medicare levy and offsets, so the real figures will differ.
Sam works two jobs in 2026-27. Job A pays $40,000. Job B pays $20,000. That’s $60,000 in total.
- Tax on $60,000 comes to $8,520 ($4,020 plus 30% of the $15,000 above $45,000).
- If Sam claims the threshold at both jobs, each employer treats the first $18,200 as tax-free. Together they withhold only about $3,540 across the year.
- The gap is roughly $4,980. Sam finds out when the tax return is lodged.
If Sam answers No at Job B, more tax is withheld from that pay. Sam doesn’t lose anything by doing this. The threshold is applied correctly when the return is lodged, and any extra tax withheld comes back as part of the assessment.
The exception: if your combined income from all jobs will stay under $18,200 for the year, you can claim the threshold at more than one payer. You wouldn’t owe tax anyway.
What happens if you get it wrong?
There are two ways to get it wrong, and they have opposite results.
Not claiming it anywhere. Too much tax is withheld during the year. You get the extra back as a refund when you lodge, but your take-home pay is lower in the meantime.
Claiming it at two payers. Too little tax is withheld. You may owe the difference at tax time, and for people with two substantial jobs that can run into the thousands.
The fix is simple. If you spot the mistake mid-year, complete a Withholding declaration with your current employer to correct your answer. Doing it early keeps any bill smaller.
If you never give your employer a TFN declaration at all, they have to withhold tax at a much higher rate. Provide the declaration promptly, generally within 14 days of starting with the payer.
What income counts towards the threshold?
All your taxable income counts, not just wages. That includes:
- Sole trader or freelance business income, less allowable deductions
- Interest and dividends
- Net rental income
- Taxable government payments
The threshold is applied to the total, so each source can look small while the combined figure isn’t.
Here’s a common case. A part-time barista earns $24,000 in wages and makes another $8,000 in profit from weekend freelance work. Together that’s $32,000, well past the threshold. But nobody withholds tax from the freelance income, so the bill lands at tax time.
If you earn side income, set aside part of every payment. Track your income and your deductible expenses. Income tax is generally calculated on assessable business income less allowable deductions, together with the individual’s other taxable income.
What is the part-year threshold?
If you become an Australian resident part-way through the year, or stop being one, you get a reduced threshold. The formula is:
$13,464 + ($4,736 ÷ 12 × months you were a resident)
The months include the one you arrived or left.
For example, if you became a resident in January, you’d count six months (January to June). That’s $13,464 plus $2,368, giving a part-year threshold of $15,832.
This is about a change in tax residency. Starting a new job or having a gap between jobs doesn’t trigger it. If you were a resident all year, you keep the full $18,200 even if you only worked a few months.
Can foreign residents and working holiday makers claim it?
Foreign residents for tax purposes can’t claim the threshold. For 2026-27 they pay 30% from the first dollar on income up to $135,000, and they don’t pay the Medicare levy.
Most working holiday makers on a subclass 417 or 462 visa don’t get the tax-free threshold either. They pay 15% on working holiday maker income up to $45,000, then the standard resident rates above that. An exception may apply to a working holiday maker who is an Australian tax resident from an eligible tax-treaty country.
Some other temporary visa holders are Australian residents for tax purposes. If you are, you can claim the threshold. Residency depends on your circumstances, not on your visa alone. The ATO has a residency tool, or a tax agent can confirm it for you.
Do you need to lodge a return if you earn under $18,200?
Often, yes. If tax was withheld from your pay, lodging a return is the only way to get it back.
If you earned very little and nothing was withheld, you may not need to lodge. In some cases the ATO still wants to hear from you, so check before you skip it.
Frequently asked questions
Should I claim the tax-free threshold?
Yes, if you’re an Australian resident and the job is your only or highest-paying one. Claiming it means less tax comes out of each pay, so you don’t overpay during the year.
Can I claim the tax-free threshold on a second job?
Generally no. Claim it at your highest-paying job and answer No at the other. The exception is when your total income from every source will stay under $18,200.
What if I forgot to claim it?
You’ll have had too much tax withheld, and you’ll get the difference back when you lodge. To stop it happening again, complete a Withholding declaration with your employer.
Does the tax-free threshold change every year?
The $18,200 amount hasn’t changed since 2012-13. The tax rates above it do change. The 2026-27 rate on income from $18,201 to $45,000 is 15%, down from 16%.
Do sole traders get the tax-free threshold?
Yes, if you’re an Australian resident. It applies to your total taxable income, including your business income after allowable deductions. There’s no employer to withhold tax, so you’ll need to plan for it yourself.
Five checks before you sign a TFN declaration
- Confirm you’re an Australian resident for tax purposes.
- List every income source you expect this year, including jobs, Centrelink and side work.
- Choose your highest-paying payer to carry the threshold.
- Answer No at every other payer, unless your combined income will be under $18,200.
- Complete a Withholding declaration if your jobs change during the year.
Not sure your setup is right?
If you have more than one job, side income or a change in residency, a quick review can save you a bill. The Collab Accounting team can check how your tax is being withheld, help with your individual tax return and set up your sole trader or small business accounts properly.
Get in touch with Collab Accounting
This article is general information and isn’t tax advice. Rates and figures are current for the 2026-27 financial year (1 July 2026 to 30 June 2027) and should be reviewed annually. Check the ATO website or speak to a registered tax agent for advice on your situation.
