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Tax-free threshold: How to calculate your tax withholdings

Want to make money without paying taxes?

It’s easy. All you have to do is earn less than the tax free threshold of $18,200.

That would equate to about $350 a week, $700 a fortnight or $1,517 per month.

Doesn’t sound quite so appealing now, does it?

But there is some good news...


Tax Free Threshold - $18,200 is tax free

Even if you make more than $18,200, you still don’t have to pay income tax on the first $18,200.

So if you end up making $18,201 at the end of the year, the government will only claim a share of the additional one dollar that falls above the threshold.

Although the tax free threshold is a simple concept, income isn’t always cut and dry.

For example, what if you get income from multiple sources? Or you earn some of your income from overseas? How much tax will you pay then?

Let’s look at a few scenarios.

How to calculate your tax withholdings

If you earn your income through regular payments from an Australian employer, they will be obliged to withhold a portion of your pay each pay period to cover the tax you’ll owe on those earnings.

This is known as tax ‘withholding’, and it’s very much in your interest.


Tax Free Threshold - Tax Withholding

The amount withheld is based on income earned. Your employer pays the withholding to the ATO (Australian tax office) monthly or quarterly, on your behalf.

By paying your tax in small instalments throughout the year, out of income you never even get to see, you’ll be saved the agony of a large tax bill at the end of the year.


How much you pay in taxes will depend on how much you earn. The more you earn, the more you pay (unfortunately).

Even if you don’t know exactly how much you expect to earn in the year (for example if you work unpredictable casual hours) you can still work out approximately how much should be withheld be based on your estimated earnings for the year.

As I said, the tax-free threshold doesn’t only apply to people who earn less than the limit. It applies to all Australian residents for tax purposes.

So regardless of how much you earn in any tax year, you can take advantage of the tax-free threshold on earnings of up to $18,200.

After that, your income will fall into a tax bracket. Take a look at the following tax table for 2018-19 to see how much of your income should be withheld for each tax bracket.

Income bracket Tax on income
0 to $18,200 Nil
$18,201 to $37,000 $0.19 per $1 over $18,200
$37,001 to $90,000 $3,572 + $0.325 per $1 over $37,000
$90,001 to $180,000 $20,797 + $0.37 per $1 over $90,000
$180,001+ $54,097 + $0.45 per $1 over $180,000

Or use our pay and income tax calculator to see how much income tax you will need to pay.

Other withholdings

Tax isn’t the only thing that your employer may withhold from your pay packet.

Here are some of the other deductions to watch out for.



Tax Free Threshold - Medicare Levy

Medicare Levy

A Medicare levy of two percent will be withheld from your pay packet on top of your tax (i.e. in addition to the amount shown in the chart above). Almost everyone will pay this levy, and some high earners may even pay up to an additional 1.5% (if they do not have an appropriate level of private medical insurance).

See how much medicare levy you need to pay with our medicare levy calculator.



Tax Free Threshold - HELP payments

Higher Education Loan Program (HELP) contributions

If you have a Higher Education Loan Program (HELP) loan, the repayment will be withheld from your pay packet once you start earning more than $51,957 (at the time of writing). Once you pass that threshold you’ll start paying a percentage of your income – like your tax, the percentage will increase along with your earnings.

You can use our tax calculator to calculate HELP payments.

Check out this table to see the thresholds and percentages for the 2018 – 19 tax year for HELP loans.

Repayment income Repayment rate
Below $51,957 Nil
$51,957 – $57,729 2.0%
$57,730 – $64,306 4.0%
$64,307 – $70,881 4.5%
$70,882 – $74,607 5.0%
$74,608 – $80,197 5.5%
$80,198 – $86,855 6.0%
$86,856 – $91,425 6.5%
$91,426 – $100,613 7.0%
$100,614 – $107,213 7.5%
$107,214 and above 8.0%


Tax Free Threshold - Trade Support Loan (TSL)

Trade Support Loan (TSL) contributions

The TSL Program is another type of government loan that’s targeted towards tradespeople, to help encourage apprenticeships. These are tax-free loans that you’ll repay from after-tax earnings through your pay packets.

Again, you won’t have to start making repayments until you earn at least $51,957, using the same percentages as for HELP.



Tax Free Threshold - Student Financial Supplement Scheme (SFSS)

Student Financial Supplement Scheme (SFSS) contributions

This was another voluntary loan scheme, discontinued in 2003, that helped tertiary students cover their expenses while in school. The thresholds and percentages for repayments in the 2018 – 19 tax year are:

Repayment income Repayment rate
Below $51,957 Nil
$51,957 – $64,306 2%
$64,307 – $91,425 3%
$91,426 and above 4%


Tax Free Threshold - Student Startup Loan

Student Startup Loan (SSL) contributions

This is a voluntary loan that eligible students (who are receiving other government-funded student living allowances) can get twice a year.

If you have any withholdings from student loans, it may be more of a challenge to calculate your withholdings. In this case, you can use the Australian Taxation Office’s withholding calculator.

If you have everything set up properly with your employer, your withholdings should fall within an accurate range. But if you have special circumstances, you may want to pay close attention to your withholdings throughout the year, so you don’t get hit with a big tax bill when you file your return.

How to handle withholdings when you have multiple payers

What happens if you earn income from more than one source, and the total is more than the tax free threshold? You may have more than one job, or you may have a job and receive a taxable pension or government allowance, or income from other sources like rent, dividends or interest.


How to handle withholdings when you have multiple payers

In this case, you can only claim the tax-free allowance from one employer, who will then take it into account when calculating how much tax to withhold. You could use it with the employer who pays you the highest salary or wage, so you will pay less tax during the year.

Or, if you have income like rent, where the tax isn’t withheld as you go along, you may prefer to pay tax at your full rate on your salary, and then save the tax-free threshold until you file your tax return, so you won’t have to pay a lump sum on your untaxed rent.

What if your income is less than $18,200?

If your total income for the taxable year is less than $18,200, you don’t have much to worry about. You’re well within the free tax threshold and will not be responsible for any taxes.

The same is true whether you have a single income source or multiple.

But if you do have multiple income sources that will not exceed $18,200 combined, you can claim the tax-free allowance from each payer, so you won’t have any tax withheld.


Tax Free Threshold - Multiple Income Sources

If you choose not to do this and pay tax on your wages, you can expect a tax refund at the end of the year. If you’re not great at putting money aside, this can be a good way to build up some savings.

Conclusion

Withholdings are amounts held back from your pay to cover money you owe to the government. They include tax, Medicare levies, and any repayments you have to make on student loans.

As painful as it can seem to lose a portion of each pay packet, this will save you from a much greater pain – a massive tax bill at the end of the financial year.

Keep an eye on your pay packet to make sure you’re paying enough as you go along, especially if you earn income from several sources or have debts like HELP to pay off.