Tax-Free Threshold Explained

If you're an Australian resident for tax purposes, the first $18,200 of your taxable income each financial year is taxed at zero. Income tax only begins on dollar $18,201, and for 2026-27 that first taxed slice attracts 15% — cut from 16% on 1 July 2026, with a further legislated drop to 14% from 1 July 2027.

The threshold isn't a discount your employer decides to give you. It's built into the resident tax scale, and claiming it on your TFN declaration tells your employer to use the withholding scale that assumes those first $18,200 are tax-free. Spread over a year, that's roughly $350 of pay a week that carries no income tax at all.

You claim it by answering yes to the threshold question on the TFN declaration you complete when you start a job — either on paper or through your employer's onboarding software. There's no separate application and nothing to renew each year.

Your answer only affects how much tax is withheld from each pay, not how much tax you ultimately owe. Your actual tax is settled on your return, where the threshold applies automatically to every resident regardless of what you ticked. If your circumstances change — say a second job becomes your main one — you can lodge a withholding declaration with each employer to move the claim.

Claim the threshold with one employer only — the one paying you the most. Your second employer then withholds using the no-threshold scale, which takes tax from your first dollar of pay there.

That feels harsh on the second payslip, but it reflects how the tax scale really works: your two incomes stack. If your main job already uses up the $18,200 tax-free band and the 15% band, every dollar from job two genuinely sits in a higher band. Claim the threshold on both and each employer withholds as though the other job doesn't exist — you'll be under-withheld all year and face a bill at tax time. On two $40,000 jobs, double-claiming leaves each employer withholding as if you earn $40,000 in total, when your real $80,000 income puts $35,000 of it in the 30% band. You can test the combined position with the income tax calculator or check each pay against the PAYG withholding calculator.

Less than the 15% rate suggests, because the low income tax offset (LITO) kicks in on top of the threshold. LITO is worth up to $700: you get the full $700 below $37,500, it tapers to $325 at $45,000, and it cuts out at $66,667. Here's the 2026-27 arithmetic at five incomes (income tax only — the Medicare levy is worked out separately and is itself phased in at these income levels):

The practical effect: because LITO wipes out the first $700 of tax, you don't actually pay any income tax until your income passes about $22,867 — the point where 15% of the excess over $18,200 exhausts the offset. LITO is applied when your return is assessed, not through your payslip.

Two situations. First, you can't claim it at all if you're a foreign resident for tax purposes — non-residents are taxed from their first dollar under a separate scale. Second, some people with a main job elsewhere, or with irregular income, deliberately leave it unclaimed on a job so extra tax is withheld as a buffer.

Not claiming costs you nothing in the end. The extra withheld through the year comes back as a refund once your return is assessed, because the threshold and LITO always apply to a resident's assessment. What you lose is access to that money during the year — for someone on $50,000, roughly $105 a week sitting with the ATO instead of in your account. The current withholding amounts for both scales are in the 2026-27 tax tables.

Your return squares everything up. The ATO calculates your actual tax across all jobs using the resident scale — $18,200 tax-free band, LITO, Medicare levy — and compares it with the total PAYG withheld. Claimed the threshold correctly on one job and the numbers usually land close. Claimed it on two jobs and the shortfall becomes a debt; claimed it nowhere and the excess becomes a refund. Deductions, offsets and any untaxed income — interest, dividends, side work — shift the final figure too, so even a correctly set threshold rarely produces an exactly zero balance.

If you got the setting wrong this year, fix it for next year by giving your employer an updated withholding declaration now — the correction to withholding starts from your next pay, while the past months are resolved through your return.