Glossary
Effective Tax Rate
Your effective tax rate is your total tax divided by your total taxable income — the percentage you actually pay. For most Australians it sits well below their marginal rate, which is why 'half my pay rise went to tax' is a myth.
What it is
Your effective tax rate is the total income tax you pay in a year divided by your total taxable income, expressed as a percentage. It answers the only question that matters: of every dollar you earned, how much actually went to the tax office? It is deliberately different from your marginal tax rate, which is the rate applied only to your last dollar of income.
Australia's system is progressive, so the first $18,200 of income is tax-free, the next slice is taxed at 16%, the next at 30%, and so on up the brackets. Averaging all those slices across your whole income always lands below the rate of your top slice. If you include the 2% Medicare Levy — and you should, because it comes out of the same pay — the figure is sometimes called your effective rate including Medicare. Economists call the whole thing the average tax rate. The label varies, but the maths never does.
Key takeaways
- Effective tax rate equals total tax divided by total taxable income — the average percentage you actually pay.
- Australia's progressive brackets mean your effective rate is always lower than your marginal rate.
- A $100,000 income in 2025-26 pays roughly 22.8% in tax and Medicare, despite sitting in the 30% bracket.
- Pay rises are taxed at your marginal rate, so no raise ever leaves you worse off after tax.
- Include the Medicare Levy and HECS-HELP repayments for a true picture of what each extra dollar costs.
How it works
The formula is one line: effective tax rate equals total tax paid divided by total taxable income, times 100. To get the numerator, apply each bracket to the slice of income inside it and add the results. For 2025-26 that is nil on the first $18,200, 16% on the slice from $18,201 to $45,000, 30% on the slice from $45,001 to $135,000, 37% up to $190,000, and 45% above that.
Take a worker on exactly $100,000. The first $18,200 costs nothing. The next $26,800 at 16% adds $4,288. The remaining $55,000 at 30% adds $16,500. Income tax totals $20,788, and the 2% Medicare Levy adds $2,000, so $22,788 leaves the pile and dividing by $100,000 gives an effective rate of roughly 22.8%.
Compare that with the marginal rate of 30%, and you see the structural gap. Every dollar below the top slice was taxed at zero, 16%, or 30%, and the average of those slices is what you actually paid. The ATO's online calculators report this average figure, which is the honest number to use when budgeting. Your payslip simply reflects it fortnight by fortnight through PAYG withholding.
Why it matters
The effective rate is the number your budget runs on, whether you know it or not. Rent, savings, offset contributions and HECS-HELP all come out of what's left after the average bite, not the marginal bite. If you think in marginal rates you will consistently overestimate your tax and underestimate your pay.
A colleague named Brent (yes, that Brent) once turned down a $7,000 pay rise because 'it would push me into a higher bracket and I'd lose money'. He earned $98,000, so his marginal rate was already 30% and the raise would have stayed at 30%. His effective rate would have crept from about 22.6% to 23.0%, and he would have banked roughly $4,900 extra after tax. He cost himself real money to avoid an imaginary cliff that Australian tax law does not contain.
The highest-leverage thing most Australians can do is run their salary through the take home pay calculator and quote their effective rate when negotiating. Before your next review, check the pay rise calculator so Brent's mistake never gets your name on it.
Real-world examples
A $60,000 salary in 2025-26: effective rate of 13.1%
A worker earning $60,000 pays nothing on the first $18,200 and 16% on the remaining $41,800, which is $6,688 in income tax. Add the 2% Medicare Levy of $1,200 and total tax is $7,888. Divide by $60,000 and the effective rate is roughly 13.1%, well under their 16% marginal rate. Their fortnightly take-home sits around $1,960, and every budgeting decision should be anchored to that figure, not to any bracket they saw in a headline.
A $100,000 salary in 2025-26: effective rate of 22.8%
At $100,000, income tax is $4,288 plus 30% of the $55,000 above $45,000, totalling $20,788. Medicare adds $2,000, leaving $22,788 of combined tax on $100,000 of income — an effective rate of roughly 22.8%. The marginal rate is 30%, nearly a third higher than the average. Anyone telling you 'the government takes a third of my pay' at this income is quoting the wrong number, and probably enjoys being wrong at barbecues.
A $7,000 pay rise from $98,000 to $105,000: the marginal dollar only
The extra $7,000 all lands in the 30% bracket, so income tax rises by $2,100 and Medicare by $140, taking $2,240 of the rise. The worker keeps $4,760, while the effective rate drifts from roughly 22.6% to 23.0%. Add a HECS-HELP debt and each extra dollar costs another 15 cents in compulsory repayment, for a combined 47 cents per dollar. Notice what never happens: take-home pay going down. Brackets tax slices, not the whole pie.
Common mistakes
Mistake: Confusing the marginal tax rate with the effective tax rate.
Why it bites you: You overestimate tax on every raise, bonus and job offer. Brent rejected $4,900 of after-tax money because he thought the 30% bracket applied to his entire salary, not just the top slice.
Mistake: Forgetting the 2% Medicare Levy when quoting your effective rate.
Why it bites you: On $100,000 the levy is $2,000 a year, enough to make a budget built on income tax alone quietly wrong by about $77 a fortnight.
Mistake: Believing a higher bracket taxes your whole income.
Why it bites you: It never does. Brackets apply to slices, so moving from $44,000 to $46,000 only changes the tax on the $1,000 above $45,000 — about $140 more in tax, not a pay cut.
Mistake: Ignoring HECS-HELP repayments when estimating the cost of extra income.
Why it bites you: Above the $67,000 repayment threshold, each extra dollar can attract 15 cents of compulsory repayment on top of 30% tax and 2% Medicare. Budget the full 47 cents or your pay rise will feel mysteriously thin.
Ivy's take
I spent an evening rebuilding the 2025-26 tax tables in a spreadsheet so you don't have to, and the punchline was disappointingly sane: there is no income where earning more leaves you with less. Not one. I checked, twice, with coffee.
The effective-versus-marginal confusion is the most expensive misunderstanding in Australian payroll, because it makes people decline money. Brent is out there right now explaining to someone that overtime 'isn't worth it' at 30%. Overtime at 30% tax is still being paid 70 cents for a dollar of work, which last I checked is how money works. Learn your effective rate once, quote it at every salary conversation, and let Brent keep his theories.
Related jargon, defined
- Marginal tax rate
- The rate applied to your last (highest) dollar of income, currently up to 45%.
- Tax bracket
- An income slice with its own rate; Australia has five resident brackets in 2025-26.
- Medicare Levy
- A flat 2% levy on taxable income funding public health, with a low-income phase-in.
- PAYG withholding
- Tax your employer deducts each pay and sends to the ATO as an estimate of your annual bill.
- Taxable income
- Assessable income minus deductions; the figure every tax calculation starts from.
- Tax offset
- A direct reduction of tax payable (like the low income tax offset), separate from deductions.
Frequently asked questions
What is the effective tax rate on $100,000 in Australia?+
For 2025-26 it is roughly 22.8% including the Medicare Levy, or 20.8% excluding it. That is far below the 30% marginal rate that applies to the top slice of that income.
Is my effective tax rate the same as my tax bracket?+
No. Your bracket sets the rate on your last dollar only, while the effective rate averages every bracket your income passed through. The effective figure is always the lower of the two in a progressive system.
Can a pay rise ever increase my effective rate by a lot?+
It rises gently, never suddenly. A move from $98,000 to $105,000 nudges the effective rate from about 22.6% to 23.0%, while the worker still banks most of the rise.
Should I include the Medicare Levy in my effective rate?+
Yes, if you want the honest number. The levy is 2% of taxable income for most earners and lands on the same payslip, so leaving it out understates your real rate by two points.
Where do I find my actual effective tax rate?+
Your ATO notice of assessment shows total tax on taxable income, so divide one by the other. For a quick forecast, the take home pay calculator reports both your marginal and effective rates.
Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.
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Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the Australian tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.