Tax season can feel like navigating a maze, but understanding tax brackets can make the journey a lot smoother. Tax brackets determine how much tax you owe based on your income, and recent changes to the Australian tax brackets for the 2023-2024 financial year bring some important updates. Let’s break down how these tax brackets work and how they impact your tax rate.
What are tax brackets?
Tax brackets are ranges of income that are taxed at specific rates. In Australia, the more you earn, the higher your tax rate. This system is designed to be progressive, meaning those with higher incomes pay a higher percentage in taxes. Here’s how the new tax brackets for 2023-2024 look:
- $0 – $18,200: No tax
- $18,201 – $45,000: 19%
- $45,001 – $120,000: 32.5%
- $120,001 – $180,000: 37%
- $180,001 and above: 45%
How do tax brackets work?
Let’s imagine you earn $80,000 a year. Your income would be taxed across different brackets:
- The first $18,200 is tax-free.
- The next $26,800 (from $18,201 to $45,000) is taxed at 19%.
- The remaining $35,000 (from $45,001 to $80,000) is taxed at 32.5%.
This means your total tax isn’t a flat rate of your total income but a combination of different rates applied to portions of your income. This structure ensures that everyone pays a fair share relative to their earnings.
Changes to the tax brackets for 2023-2024
The 2023-2024 financial year brings some notable changes aimed at providing relief to middle-income earners. Here are the key updates:
- Increased Upper Limit for the 19% Bracket:
- Previously, the 19% bracket was capped at $37,000. Now, it extends to $45,000, which means more income is taxed at a lower rate, reducing the overall tax burden for many Australians.
- Wider 32.5% Bracket:
- The upper limit for the 32.5% bracket has been raised from $90,000 to $120,000. This change means that individuals earning up to $120,000 will benefit from the lower tax rate on a larger portion of their income.
These changes are particularly beneficial for middle-income earners, allowing them to keep more of their hard-earned money.
Why do tax brackets matter?
Understanding how tax brackets work can help you make informed financial decisions. Here are a few ways this knowledge can benefit you:
- Tax planning:
- By knowing which tax bracket you fall into, you can plan your finances better. For instance, if you’re close to the upper limit of a lower tax bracket, you might decide to defer additional income to the next financial year to avoid moving into a higher bracket.
- Investment decisions:
- Tax brackets can influence your investment choices. Understanding the tax implications of your investments can help you maximise your after-tax returns.
- Salary negotiations:
- When negotiating a salary, it’s helpful to know how additional income will be taxed. This knowledge can assist you in understanding your net income after taxes.
Need help navigating the complexities of tax brackets?
Tax brackets play a crucial role in determining how much tax you owe based on your income. The recent changes to the Australian tax brackets for 2023-2024 are designed to provide relief to middle-income earners, making it essential to stay informed about how these updates impact you. Understanding tax brackets not only helps you plan your finances better but also ensures you’re making the most of your income.
If you need assistance navigating the complexities of tax brackets and tax planning, consider reaching out to a professional tax accountant. They can provide expert advice and ensure you’re taking full advantage of all available benefits.
This article was written by Richard Ferraro, a friendly and approachable expert in the world of finance. Richard brings three decades of experience in Financial Accounting, Tax Compliance, and Advisory to the APS team. Before spending the past 11 years at APS, Richard was a partner in a top 100 accounting firm and served as a Taxation Manager for major corporations like Nissan Australia, Bendigo and Adelaide Bank, NEC Australia, and Australia Post.
Richard is dedicated to supporting his clients with a wide range of services, including tax compliance and advisory for Companies, Trusts, Partnerships, and Self-Managed Super Funds. His friendly demeanour and vast expertise make navigating financial complexities a breeze. When he’s not helping clients, Richard loves spending quality time with his family and friends. He’s an avid supporter of the mighty Magpies and enjoys anything related to cars, from F1 racing to supercars and collectables.