Marginal tax rate
The tax rate on your next dollar of income.
Your marginal tax rate is the rate of tax you pay on your next dollar of income. Australia uses a progressive system, so income is taxed in bands — only the income that falls inside a higher band is taxed at that higher rate, not your whole income.
It’s why a pay rise never leaves you worse off: only the extra income in the new band is taxed higher. Your average rate — total tax divided by total income — is always lower than your marginal rate.
Worked example
On $50,000 of taxable income, the first $18,200 is taxed at nothing and only the slice above it is taxed. So a raise that pushes you into a higher band only taxes the dollars inside that band — your earlier income keeps its lower rates. That’s why your average rate stays well under your marginal rate.
Common mistake
Turning down work or a raise because it will “push you into a higher tax bracket”. It cannot leave you worse off — only the extra dollars above the threshold are taxed higher, never the income underneath.
Grounded in ATO guidance. Figures last checked . General information, not tax advice.
Related terms
Tax-free threshold
The first $18,200 of income you can earn tax-free.
Taxable income
Assessable income minus deductions — what tax is actually on.
Sole trader tax rate
There isn’t one — you’re taxed at personal marginal rates.
Medicare levy
A 2% levy on most taxable income that funds public health.
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Questions about this term
Marginal tax rate: common questions
- Can a pay rise leave me with less take-home pay because of tax brackets?
- No — under Australia’s progressive system only the income that falls inside a higher band is taxed at that higher rate, never the income underneath. A raise that pushes you into a new bracket taxes only the extra dollars above the threshold. Turning down work or a raise to stay in a lower bracket cannot leave you better off.
- Why is my average tax rate lower than my marginal rate?
- Because your income is taxed in slices, not all at your top rate. On $50,000 of taxable income the first $18,200 is taxed at nothing and only the slice above it is taxed, so total tax divided by total income — the average rate — always comes out below the rate on your last dollar. The income tax calculator on this site shows both figures for your own income.
- Does a sole trader pay a different marginal rate?
- No — business profit is added to your other income and taxed at the same individual marginal rates anyone else pays. There is no separate sole trader rate; only companies pay a flat company tax rate. What differs for a sole trader is that nobody withholds the tax through the year, so setting it aside is up to you.
- Is the tax-free threshold one of the marginal-rate bands?
- Yes — it is the lowest band. The first $18,200 of taxable income is taxed at nothing, and each higher band applies only to the income that falls inside it. That is why every taxpayer, whatever their top rate, gets the same untaxed first slice; the bands stack on top of it rather than replacing it.
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