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What will happen to your money when you jump a tax bracket?

Written by

Shaun McGowan

If you're like most people, you're on a mission to earn more money. With each pay raise, it's time for celebration.

But what happens when a pay raise brings you into the next tax bracket? How much celebrating should you do then? Could you actually end up taking home less money after a raise?

In this post, I’m going to look at the Australian tax brackets and delve into how much you will actually make the high and low end of each.

Because maybe you won't be so quick to ask for a raise if most of your money is going to be swallowed up in taxes anyway.

Australian tax brackets

The following chart will give you an overview of the tax brackets used in Australia. You should be able to take a quick look and see which bracket you fall in.

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

By the way, these tax rates don’t include the Medicare levy, which will cost you at least another two per cent – or more if you’re a high-earner without sufficient private health cover.

Will you earn less in a higher tax bracket?

This is could be a big worry if a pay rise (even an incremental cost-of-living increase) will push you over the threshold into a new bracket.

But I have good news for you. Even when you move up to the next tax bracket, a pay rise will always equate to more take-home money. Because of how the Australian tax system is set up, you pay a different amount of tax on each ‘band’ of money you make.

You will pay more tax on any portion of the additional pay that falls into the new bracket – but you won’t pay any extra tax on the money you were already earning.

Take a look at an example

Let's say you're making $37,000 a year. In your tax bracket, you will pay $3,572 in taxes.

This would bring your after-tax earnings to $33,428. In total, you’re handing 9.65% of your pay over in tax.

If you get a small raise and start earning $38,000 in one year, you'll pay $3,897 in taxes, bringing your total after-tax income to $34,103.

Now, you’re paying a total of 10.35% of your salary in tax.

As you can see, you do end up paying more taxes in a higher tax bracket. But you will still take home more money in total.

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So is it a bad thing to move up a tax bracket?

Here's the truth... It's a double-edged sword.

On the one hand it's a good thing, because you're making more money. You're also taking home more money in every pay packet.

But a higher tax bracket also means that you're paying a larger percentage of your income towards taxes.

Which means the pay rise won’t have nearly as much of an impact on your take-home pay as you might have hoped, because a larger portion of it will be swallowed up in tax.

In the example above, you got a pay rise of $1000, but you only receive $648 after tax because you pay 32.5c per dollar of the extra pay. If you were still in the lower tax bracket, that pay rise would have brought you $810, because you were only paying 19c per dollar in tax.

So exactly how much will I have to pay in taxes?

In the example I shared with you, the total tax payment was on the lower end.

Paying $3,428 may not seem like a lot of money. Not when we’re talking about taxes.

Bit what if you made $200,000? Well, in that case, you'd pay $63,097.00 in taxes. That's about 31.5 percent of your income.

As your income increases, so will the percentage of your income that goes to taxes.

If you made $300,000 each year, you’d pay $108,097. This would equate to about 36 percent of your income.

Australia

Conclusion

It’s clear to see why it’s not super exciting to move up a tax bracket. Making more money means that you get to keep a smaller percentage of it. And the odds are, you’ll have to work harder for that extra pay, effectively for less reward.

But all this completely ignores tax deductions, which can really help to keep your overall tax percentage down – and the higher your tax bracket, the more valuable these will be to you.

There’s more good news, too. With more cash coming in you may also have money to spare to invest in extra superannuation contributions – which is an excellent way to lower your tax bill. Your employer may even offer salary sacrifice options that can considerably cut your tax down, too.

So don’t be afraid to make more money.

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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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