Australia's income tax thresholds, $18,200 tax-free, then $45,000, $135,000 and $190,000, are fixed dollar figures. They don't move with inflation or wages. So as pay packets grow, a growing share of every taxpayer's income sits in their upper bands, and the average tax rate drifts upward with no new law, no budget measure, and no announcement. Economists call it fiscal drag; everyone else calls it bracket creep.
You don't need to cross a bracket
The name misleads. Creep doesn't come from "being pushed into a higher bracket", it operates continuously, even deep inside one band. The mechanics are the marginal/average distinction covered in our tax brackets guide: your pay rise is taxed entirely at your top (marginal) rate, while your existing income keeps its blended lower average. Each rise therefore nudges the average up. The tax-free threshold is the clearest lens: at $60,000 it shelters 30% of your income; at $90,000, only 20%. Same threshold, less protection, higher average rate.
Five years of 3% rises, one drifting tax rate
Take someone on $80,000 today whose pay rises 3% a year, roughly holding its real value. Holding FY 2026–27 settings fixed:
| Year | Salary | Effective rate (tax + levy) |
|---|---|---|
| Now | $80,000 | 20.2% |
| +1 | $82,400 | 20.5% |
| +2 | $84,872 | 20.8% |
| +3 | $87,418 | 21.2% |
| +4 | $90,041 | 21.5% |
| +5 | $92,742 | 21.8% |
No bracket is crossed: the salary stays inside the 30% band the whole time, yet the average rate climbs from 20.2% to 21.8%. By year five that drift is worth about $1,510 a year in extra tax compared with the average rate the same real income paid at the start. Multiply across every taxpayer and bracket creep is why income tax collections grow faster than wages between rate cuts.
The current give-back: 16% → 15% → 14%
Governments periodically return accumulated creep as discretionary cuts. The round now in law (Treasury Laws Amendment (More Cost of Living Relief) Act 2025) cuts the rate on the $18,200–$45,000 band: 16% until 30 June 2026, 15% from 1 July 2026, and 14% from 1 July 2027, worth up to $268 a year per taxpayer for the first step and the same again for the second. Note the design: rates cut, thresholds untouched. The bands stay fixed in nominal dollars, so the creep clock keeps ticking on all of them; see the tax brackets guide for the full current table.
Why thresholds aren't just indexed
Indexing thresholds to CPI or wages would end bracket creep permanently, and Australia briefly did index them in the late 1970s before abandoning it. Every government since has preferred the current arrangement for the same two reasons: creep delivers automatic revenue growth without legislation, and handing it back in visible "tax cut" announcements has obvious appeal. That's a description of the incentive, not a defence of it, but it explains why the cycle of quiet-creep-then-headline-cut persists.
What you can do
- Judge pay rises after tax. An inflation-matching rise leaves you slightly behind in real take-home terms, worth knowing in a negotiation. The take-home pay calculator shows any rise's after-tax value.
- Use the pre-tax limits that are indexed. Concessional super contributions are taxed at 15% instead of your rising marginal rate, and the cap is indexed (it rose to $32,500 this year). The salary sacrifice calculator quantifies it.
- Watch the un-indexed thresholds that bite hardest. The Division 293 $250,000 threshold has been fixed since 2017, bracket creep in its purest form.
Sources
Figures on this page come from the following primary sources. The date is when we last checked the page against the source.
- Tax rates for Australian residents (ATO), checked 27 July 2026.
- Treasury Laws Amendment (More Cost of Living Relief) Act 2025 (Federal Register of Legislation), checked 27 July 2026.
Related
Tax brackets 2026-27: the current bands and the legislated 2027 cut, plus effective tax rates at common salaries. Take-home pay calculator: your next rise, after tax.
Figures current as at 14 September 2026. Rates and the legislated 2026/2027 cuts verified against Treasury legislation and ATO pages; all effective rates computed from the FY 2026–27 engine per our methodology. General information only, not financial advice.