Australian Tax-Free Threshold 2025-2026 – How It Impacts Your Payslip

Direct answer first:
For the 2025-2026 financial year, the Australian tax-free threshold remains $18,200. If you are an Australian resident for tax purposes and you claim the tax-free threshold, you do not pay income tax on the first $18,200 you earn. This directly affects how much tax is withheld on your payslip each pay period.

I have spent years reviewing payslips where employees felt something was “off” but could not explain why. In a surprising number of cases, the issue traced back to a simple misunderstanding of the tax-free threshold. Not a payroll error. Not fraud. Just confusion.

Let’s fix that.

Key takeaways

• The tax-free threshold for 2025-26 is $18,200
• Claiming it reduces tax withheld on your payslip
• Not claiming it increases withholding and often leads to refunds
• The threshold affects PAYG withholding, not your gross pay
• Only Australian residents for tax purposes can claim it

What is the Australian tax-free threshold?

The tax-free threshold is the amount of income you can earn in a financial year before income tax applies. For 2025-26, that amount is $18,200.

Think of it like a buffer zone. Earnings inside that zone are not taxed. Earnings above it are taxed progressively.

This is not a tax refund. It is not an offset. It is a built-in feature of Australia’s income tax system that directly shapes your payslip.

Why the tax-free threshold shows up on your payslip indirectly

Here is where many people get tripped up.

Your payslip does not show a line that says “tax-free threshold used”. Instead, the threshold is baked into the PAYG withholding calculation your employer applies each pay period.

If you claim the threshold:

• Less tax is withheld from each pay
• Your take-home pay increases

If you do not claim it:

• Tax is withheld from the first dollar you earn
• Your payslip shows higher tax deductions
• You often receive a refund at tax time

Same income. Very different payslip.

Claiming the tax-free threshold and its payslip impact

When you start a job, you complete a TFN declaration. One small checkbox on that form determines a big part of your payslip experience.

If you claim the threshold

• PAYG tax withheld is lower
• Net pay increases
• Weekly or fortnightly cash flow improves

If you do not claim the threshold

• PAYG tax is higher every pay
• Net pay is lower
• Refunds are common at year-end

Neither option is illegal. One just gives you your money sooner.

Example – same income, different payslip result

Imagine two employees earning $30,000 per year.

Employee A claims the tax-free threshold

• No tax on the first $18,200
• Tax applies only to the remaining amount
• Payslip shows lower tax withheld each period

Employee B does not claim the threshold

• Tax withheld from dollar one
• Payslip shows noticeably higher deductions
• Refund likely after tax return

Payroll did nothing wrong in either case. The difference came from the threshold choice.

How this affects casual and part-time employees

Casual and part-time workers feel this impact more sharply because their income fluctuates.

On a payslip, this can look like:

• One week with no tax withheld
• Another week with noticeable tax deductions

This is not inconsistency. It is the PAYG system adjusting your withholding based on projected annual income using the tax-free threshold.

Many casual workers panic the first time tax appears “out of nowhere” on a payslip. In reality, the system is correcting itself.

What others get wrong about the tax-free threshold

“If I earn under $18,200, I should never see tax on my payslip”

Wrong. Withholding is an estimate. Refunds correct it later.

“Claiming the threshold means I will never pay tax”

Only if your total income stays under the threshold.

“Payroll decides whether I get the threshold”

No. Payroll follows what you declared.

“It reduces my taxable income”

No. It reduces tax withheld, not income earned.

Multiple jobs and the threshold problem

If you have more than one job, you should usually claim the tax-free threshold from only one employer.

Claiming it from multiple employers often results in:

• Too little tax withheld
• A tax bill at year-end
• Shock and confusion

Your payslips may look generous all year, then painful at tax time.

Residents vs non-residents

Only Australian residents for tax purposes can claim the tax-free threshold.

If you are a non-resident:

• Tax is withheld from the first dollar
• Your payslip will always show PAYG deductions
• The threshold does not apply

If your residency status is wrong in payroll, your payslip will be wrong too.

How to check if your payslip reflects the threshold correctly

I recommend doing this once per year:

1. Look at gross pay
2. Compare tax withheld to expected income
3. Confirm whether you claimed the threshold
4. Check consistency across payslips

If the numbers feel off, they usually are.

Final verdict

The Australian tax-free threshold for 2025-2026 does not change how much you earn, but it dramatically changes how your payslip looks and how much cash you take home each pay period.

If you understand it, your payslip makes sense.
If you ignore it, your payslip feels random.

Most payroll confusion is not caused by complex tax law. It is caused by one unchecked box on a form that nobody explains properly.

Now you know better.