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Tax-free threshold: how to calculate your tax withholdings

Written by

Shaun McGowan

Want to make money without paying taxes?

It’s easy. All you have to do is make less than the tax 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… Even if you make more than $18,200, you still don’t have to pay taxes on that initial income.

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 keep back a portion of your pay each week to cover the tax you’ll owe on those earnings.

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

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 everyone.

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 brackets. Take a look at the following chart to see how much of your income should be withheld for each tax bracket.

Income bracketTax 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

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.

  • 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%.
  • 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. 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.

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

Repayment income (RI*)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%

  • 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.
  • 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 (RI*) thresholdsRepayment rate

Below $51,957

Nil

$51,957 – $64,306

2%

$64,307 – $91,425

3%

$91,426 and above

4%

  • Student Start-up 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? 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.

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 payers.

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.

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.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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