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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 per cent 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.


Tax Free Threshold Savings Strategy


Now that we've discussed the ATO's Tax-Free Threshold, let's look at a unique savings strategy which can guarantee you a lump-sum repayment. Saving money this way is not about generating new money; instead, it’s a technique that will see you pay a little more tax than you need to, and in return receive a significant tax refund at the end of the financial year.


This strategy is ideal for people who are committing to a budget plan but struggle to save without systems in place to assist them in doing so - by paying tax on your first $18,200 of income (which is usually tax-free as outlined above), you are accumulating a surplus of money with the ATO which you will later receive in a lump sum refund in your tax return.


In this guide, we’ll walk you through the simple steps on how to save anywhere between $3,500 - $8,000.


How does the ATO not charge tax on your first $18,200?


When you begin your job, your employer will ask you to complete a ‘tax file number declaration’ form.


On this form, Question 8 will ask you:


‘Do you want to claim the tax-free threshold from this payer?’

  • If you answer Yes: your first $18,200 will not be taxed
  • If you answer No: you will pay tax on every dollar, including the first $18,200

The Tax-Free Threshold Savings Strategy requires you to answer No.

How the Tax-Free Threshold Savings Guide works to save you money


Answering ‘No’ to the tax-free threshold question will see you pay tax on your entire earnings, unlike the above scenario where you would only pay tax on the portion of income after the initial, tax-free $18,200 is deducted.


To explain this, let’s use the same scenario of an individual earning $40,000.


In this example, the tax you would pay is:

  • $3,572 flat rate of tax
  • 32.5 cents for each $1 of the first $18,200 ($5,915)
  • 32.5 cents for each $1 over $37,000 ($975)
  • Total tax you pay in a year is $10,462 ($3,572 + $5,915 + $975)
  • The actual tax you should have paid is $4,547
  • This means your tax refund will be $5,915

How the calculation works


In this scenario, you have paid $5,915 more tax than you needed to. By simply ticking ‘No’ to the tax-free threshold from your employer, the ATO has taken nearly $6K more than they needed. This money will be fully refunded to you at tax time.

Why the Tax-Free Savings Strategy works


In an ideal world, you would be better off receiving the tax-free threshold and increasing your monthly earnings. As the saying goes, a dollar in our bank account today is often better than in someone else’s account.


You could use this money to:


  • Start a savings account
  • Pay down debt
  • Begin investing on a regular basis

However, we don’t live in an ideal world, and many of us struggle with the discipline of saving money. This strategy helps create a simple sense of discipline - it’s a reliable, ‘out of sight, out of mind’ savings strategy that will deliver you a yearly lump sum of cash.


Using a strategy like this will guarantee you a set amount of money saved per year.


Calculate Tax-Free Savings Threshold Savings


If you want a rough estimate of how much you could potentially save using this strategy, simply do the following:

  • Find your individual income tax rate (specifically the cents per dollar you pay, based on your salary bracket) from the ATO
  • Multiply the cents per dollar by $18,200 (which would normally be tax-free income)
  • This will give you an estimated refund amount

Tax-Free Savings Threshold Strategy Savings Comparison

Tax Bracket and Income Amount Saved
19% - ($18,201 – $37,000) $3,458
32.5% - ($37,001 – $90,000) $5,915
37% - ($90,001 – $180,000) $6,734
45% - ($180,001 and over) $8,190

If you have further tax deductions, you may get a larger refund on top of these amounts. Similarly, if you aren’t paying enough tax on other forms of income, you may have your amount above reduced to cover the amount of tax you are responsible for paying.

MONEY TIP

It’s important to remember that everyone has different financial situations. You may have a simple or complex tax situation, thus use the numbers above as more of a guide.

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.