What is the tax-free threshold? We’re so glad you asked.
It’s the first $18,200 that you earn in a financial year.
What is a tax-free threshold?
More questions! Righto.
A tax-free threshold is the point in your annual income from where you effectively “start” paying income tax on earnings past this point. Tax on any income below this threshold is levied at a rate of 0% – so, your income-tax owed is $0.
In Australia, we have a tax-free threshold of $18,200. Basically, any income you earn up to $18,200 is income-tax free. You would start effectively paying income tax on your $18,201 dollar earned onwards.
Claiming the tax-free threshold
For sole traders, it’s fairly straightforward. You’d factor in the tax-free threshold when calculating your effective tax rate for your personal income at the end of the financial year. But if you’re also a PAYG employee, you’d have to claim the tax-free threshold with your employer.
Essentially, your employer won’t know that you’re also earning income elsewhere, and you can’t use the tax-free threshold twice for different income sources. It can only be applied once across your total personal income. So if your PAYG job is your main gig, you’d claim the tax-free threshold with your employer, and they’d factor that in when withholding tax on your pay.
If you work for multiple employers, it’s the same deal: you can only claim the tax-free threshold with one of them. You should notice that the tax withheld will be lower for your paychecks where you’ve claimed the tax-free threshold, but don’t sweat – you’re still paying the same amount of tax that you would if you just had the one job!
It might feel a little confusing, but it all works out because in Australia, our income tax is a progressive tax system.
What is a progressive tax system?
Wow, you’re really keeping us on our toes today. A progressive income tax system means that there are income brackets which dictate how much tax you pay. This is so people who earn more money are progressively paying a higher rate of tax, because they have a higher rate of tax to pay on their higher income.
The theory behind a progressive tax system is that it’s fairer in some ways than a flat-rate system (with only one rate of tax on all income) because those at the lower end can’t afford higher rates of taxes.
💡 For a more in-depth explanation, check out our article on tax rates for sole traders.
Hnry does your taxes
Gosh, we’ve said the words ‘income’ and ‘tax’ a lot, but we hope we’ve erred on the side of informative rather than confusing – we don’t like tax things to be any more confusing than they need to be!
If you’re keen to learn more, we have more detailed guides covering everything you need to know about tax as a sole trader. Or, you could just use Hnry. We do it all for you.
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