Ever glanced at your payslip and wondered where your tax calculations begin? The starting line for most Australian taxpayers is the tax-free threshold.
In simple terms, it’s the amount of income an Australian resident can earn each financial year before paying any income tax. For the 2025 financial year, the tax-free threshold amount is $18,200. Claiming it means your employer won’t withhold tax from the first $18,200 you earn, increasing your take-home pay.
What Is the Tax-Free Threshold in Australia?
The tax-free threshold is a cornerstone of Australia’s progressive tax system, designed to give low-income earners financial breathing room. It is the amount of income you can earn before you need to pay tax.
The tax-free threshold in Australia is the amount of income you can earn before paying any income tax. For the 2025 financial year, it’s $18,200 for Australian residents. If you claim it, less tax is withheld from your pay. Non-residents aren’t entitled to this threshold.
When you start a new job, you fill out a Tax File Number (TFN) declaration form. This is where you tell your employer whether to apply the threshold to your pay.
By claiming it, you instruct your employer not to withhold tax from the first $18,200 of your annual income. This directly impacts your take-home pay, making it higher each pay cycle. The threshold has been a stable feature of our tax system for years, having been significantly increased from $6,000 in the 2012–13 financial year to simplify the system for low-income earners. If you’re interested in the history, SuperGuide has some great insights on Australian tax brackets.
Here’s how it works with the Pay As You Go (PAYG) withholding system:
- If you claim the threshold: Your employer withholds less tax, meaning more money in your bank account each payday.
- If you don’t claim the threshold: Your employer withholds tax from the very first dollar you earn. This results in less take-home pay but often leads to a larger tax refund when you lodge your annual tax return.
Understanding this concept is crucial for managing your tax affairs, avoiding a surprise tax bill, and optimising your cash flow.
How Much Is the Tax-Free Threshold in 2025?
For the 2024–2025 income year, the tax-free threshold amount is $18,200. This means if you are an Australian resident for tax purposes, you can earn up to this amount without paying any income tax.
The threshold is the first tier in the progressive income tax system. It ensures that no matter your total income, the first $18,200 is tax-free.
Current ATO Income Tax Brackets
Here are the official ATO resident income tax rates for the 2024–2025 financial year, which show how the threshold fits into the broader tax system.
| Taxable Income | Tax on this Income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19 cents for each $1 over $18,200 |
| $45,001 – $135,000 | $5,092 plus 30 cents for each $1 over $45,000 |
| $135,001 – $190,000 | $32,092 plus 37 cents for each $1 over $135,000 |
| $190,001 and over | $52,442 plus 45 cents for each $1 over $190,000 |
Note: These rates do not include the Medicare levy of 2%.
As you can see, the first bracket is $0 – $18,200, where no tax is payable. Your income is only taxed at higher rates on the portions that fall into the subsequent brackets.
Who Can Claim the Tax-Free Threshold?
Not everyone earning money in Australia is entitled to the full $18,200 tax-free threshold. Eligibility hinges on one key factor: your residency status for tax purposes, as determined by the Australian Taxation Office (ATO).
If the ATO considers you an Australian resident for tax purposes for the entire financial year, you can claim the full threshold. Getting this wrong is a common mistake that can lead to a significant tax debt.
Australian Residents vs Non-Residents
An Australian resident for tax purposes is generally someone who lives in Australia or has strong, ongoing ties to the country. A key aspect is that you are taxed on your worldwide income, both from Australian and overseas sources.
In contrast, a non-resident for tax purposes does not meet the residency tests. The tax rules for non-residents are stricter:
- They are taxed from the very first dollar earned in Australia.
- They are not entitled to the tax-free threshold.
- The non-resident tax rate starts at 32.5% for income up to $120,000.
Part-Year Residents and Working Holiday Makers
What happens if you become an Australian resident part-way through the financial year? In this scenario, you cannot claim the full $18,200. Instead, your tax-free threshold is adjusted on a pro-rata basis, calculated from the date your residency commenced. This is a critical detail for migrants and expats to get right. If you need help with this, our guide on tax clearance for migrants and expats offers more clarity.
Working holiday makers (on visa subclasses 417 or 462) have their own specific tax rates. They generally cannot claim the tax-free threshold and are taxed at a rate of 15% on earnings up to $45,000.
How to Claim the Tax-Free Threshold
Claiming the tax-free threshold is a simple but important step when you start a new job. Doing it correctly ensures the right amount of tax is withheld from your pay, helping you avoid a tax bill or giving the ATO an interest-free loan with your overpaid tax.
It all happens on your Tax File Number (TFN) declaration form.
This form is your official instruction to your employer on how to calculate your PAYG withholding.
Step-by-Step: Claiming on Your TFN Declaration
On the TFN declaration form, you will find the crucial question: “Do you want to claim the tax-free threshold from this payer?”
Your answer directly affects your take-home pay.
- Assess Your Situation: Determine if this is your only job or your main source of income.
- Tick ‘Yes’ for Your Main Job: If this is your only job, or the one that pays the most, tick ‘Yes’. This tells your employer not to tax the first $18,200 of your annual income. The result is more cash in your bank account each pay cycle.
- Tick ‘No’ for a Second Job: If this is a second or third job, you must tick ‘No’. This instructs your employer to withhold tax from the first dollar you earn, which helps cover your total tax liability across all income sources.
What if you forget to claim it or tick ‘No’ by mistake on your main job? You’ll pay more tax throughout the year. While you will likely get this back as a refund at tax time, it means the ATO holds onto your money instead of you.
Key Takeaway: For most Australian residents with a single job, ticking ‘Yes’ on the TFN declaration is the correct choice to maximise your regular cash flow. For a deeper dive, our guide on how to claim the tax-free threshold in Australia for 2025 has more practical tips.
Example: How the Tax-Free Threshold Works
Let’s make this practical with an example. Imagine you are an Australian resident earning an annual salary of $60,000. Here’s a breakdown of how your tax would be calculated using the 2025 resident tax rates:
- First $18,200: You pay $0 tax on this portion, thanks to the threshold.
- Income from $18,201 to $45,000: This portion is $26,800 ($45,000 – $18,200). It’s taxed at a rate of 19%.
- Tax on this bracket: $26,800 x 0.19 = $5,092
- Income from $45,001 to $60,000: This final portion is $15,000 ($60,000 – $45,000). It’s taxed at the next rate of 30%.
- Tax on this bracket: $15,000 x 0.30 = $4,500
Adding it all up, your total estimated income tax for the year would be $9,592 ($5,092 + $4,500). This does not include the Medicare levy, but it clearly shows how the threshold provides a significant tax-free base before the marginal rates apply.
Table: 2025 Tax Brackets and Withholding Rates
The ATO provides detailed tax tables that employers use to calculate how much tax to withhold from your pay. These tables account for the tax-free threshold.
Here is a simplified look at the weekly withholding rates for an individual claiming the tax-free threshold in 2025.
| Weekly Earnings | Approximate Tax Withheld |
|---|---|
| Up to $350 | $0 |
| $500 | $28 |
| $1,000 | $151 |
| $1,500 | $328 |
| $2,000 | $526 |
Note: These are approximate figures based on ATO weekly tax tables for 2024–25 and do not include HELP/HECS debt repayments or other variables.
Claiming the Threshold for Multiple Jobs
Juggling multiple jobs is common, but it’s where a costly tax mistake can easily happen.
The golden rule is simple but critical: you can only claim the tax-free threshold from ONE employer at a time.
If you claim the threshold from more than one employer, they will both apply the $18,200 allowance to your pay. This means neither is withholding enough tax to cover your total income for the year. The result is almost always a surprise tax bill when you lodge your return with the Australian Taxation Office (ATO).
The correct approach is to claim the threshold from your highest-paying job. For your second job (and any others), you must tick ‘No’ on the TFN declaration form. This tells your second employer to withhold tax from the first dollar you earn, ensuring you meet your overall tax obligations and avoid a debt.
Common Mistakes and How to Avoid Them
- Claiming the Threshold on Multiple Jobs: This is the most frequent error. Always claim it from one employer only usually the one that pays you the most.
- Incorrect Residency Status: Assuming you’re a resident for tax purposes when you aren’t. Non-residents cannot claim the threshold. Always verify your status with the ATO if you’re unsure.
- Forgetting to Update Your TFN Declaration: If your work situation changes (e.g., you switch your primary job), you must submit a new TFN declaration to your employers to ensure tax is withheld correctly.
- Not Claiming It When You Should: If you have one job and your income will be over $18,200, you should claim the threshold. Not doing so means you overpay tax during the year.
FAQs
What is the tax-free threshold in Australia?
The tax-free threshold is the amount of income you can earn before you have to pay income tax. For the 2025 financial year, it is $18,200 for Australian residents.
Who can claim the tax-free threshold?
Only individuals who are considered Australian residents for tax purposes for the entire income year can claim the full tax-free threshold. Non-residents and working holiday makers on certain visas generally cannot.
Should I claim the tax-free threshold on multiple jobs?
No. You should only claim the tax-free threshold from one employer at a time, typically your main or highest-paying job. Claiming it on multiple jobs will likely result in a tax debt at the end of the year.
How do I claim the tax-free threshold?
You claim it by ticking ‘Yes’ to the relevant question on the Tax File Number (TFN) declaration form that you provide to your employer when you start a new job.
What happens if I don’t claim the tax-free threshold?
If you are eligible but choose not to claim it, your employer will withhold more tax from your pay throughout the year. This means less take-home pay, but you will likely receive a larger tax refund after lodging your tax return.
Can I change my decision about claiming the threshold?
Yes. If your circumstances change, you can submit a new TFN declaration form to your employer at any time to either start or stop claiming the threshold.
Conclusion
Understanding what the tax-free threshold is in Australia is fundamental to managing your personal finances. It directly impacts your take-home pay and your final tax position at the end of the financial year. By ensuring you claim it correctly on one job only and only if you’re an eligible resident you can avoid unexpected tax bills and maintain healthy cash flow.
For a complete picture of how this fits with your overall tax obligations, check out our guides on ATO tax brackets for 2025.
If you need a hand lodging your tax return, managing multiple income streams, or simply want professional advice, the team at Nanak Accountants is here to help. Contact us today for a consultation.
