Everything you need to know about the new tax cuts

A surprise series of tax cuts in the government’s final budget before the election will deliver a sugar hit for every taxpayer, who will save hundreds of dollars over the next few years.

It’s the latest move by the Albanese government to reduce the amount of income tax paid by Australians, building on its tweaks to tax cuts last year.

Here’s what you need to know about how the proposed cuts work and what you have to gain.

How does the tax cut work?

From July 1 next year, the bottom tax rate will be cut by 1 percentage point to 15 per cent, if the new tax cuts pass parliament. From July 1, 2027, that same tax rate will be reduced to 14 per cent.

That applies to income between $18,201 and $45,000, benefiting people who earn in that range and above.

It follows on from the stage 3 tax cuts last year, which reduced two tax rates and lifted two thresholds, including cutting the rate applied to taxable income earned between $18,201 and $45,000 to 16 per cent.

How much will I save in tax?

The new tax cuts, which are slated to come into effect in 2026-27 and 2027-28, would save every taxpayer as much as $268 in the first year, and another $268 on top of that in the second.

Here are the savings by income brackets.

To break that down further, it amounts to $5 a week back in your pocket in 2026-27, rising to $10 a week in 2027-28.

The government will be talking up the combined benefits of its tax cuts over the past two years and its new measures. It claims all those measures will save taxpayers on an average full-time income of $103,000 about $2790 a year, or $49 a week, from 2027-28.

How much will the tax cuts cost the budget?

Over the three years from 2026-27, the new tax cuts will cost $17.1 billion in revenue, a relatively small proportion of the overall federal budget. However, the government has also outlined $36 billion in new spending over four years, and just $2 billion in savings.

The new tax cuts will cost $3 billion in the first year, $6.7 billion in 2027-28 and $7.4 billion in 2028-29.

Why are we getting these tax cuts?

There are two reasons. First, there is an election around the corner, likely to be called in a matter of days, and there are few things that endear a politician to a voter quite like a tax cut.

The second reason is bracket creep, which occurs when people are pushed into a higher tax bracket because their salary rises – usually in line with inflation over time – even though their wage increases have been eaten away by price rises.

The new tax cuts aim to return some of that bracket creep to voters by lowering the average tax rate for all taxpayers. These two tax cuts apply equally to all voters, but they will help low-income earners most because bracket creep affects a larger share of their income.

A government could solve bracket creep by linking the tax brackets to inflation (this is called indexation). But no political party has proposed such a major change to the tax system.

Hasn’t Labor already announced this tax cut?

No, though the confusion is understandable. The stage 3 tax cuts that Labor inherited from the former Coalition government kicked in on July 1 last year. The tax cuts Treasurer Jim Chalmers announced on Tuesday are small, but they are definitely new.

The Treasurer urged voters to think of the new tax cuts as “modest but meaningful”, and to consider them as part of a package of measures – including cheaper medicines, increased bulk-billing at the doctor, cheaper childcare and more – designed to ease cost-of-living pressure on households.

The Coalition, for its part, will probably argue the tax cuts are too small, and faces a choice between supporting them or proposing more substantial tax relief.

What about the increase in the Medicare levy low-income thresholds?

The government is planning to tweak the rules for the Medicare levy to ensure Australians on low incomes continue to be exempt from the charge as incomes rise with inflation.

The levy is paid by taxpayers above an income threshold that starts at $26,000 for singles, phasing in at 10¢ for every dollar of earnings above that amount. Then, above $32,500, the full Medicare levy kicks in at 2 per cent of pre-tax pay.

Backdated to July 1, 2024, the government will raise the thresholds by 4.7 per cent, meaning more than 1 million Australians on lower incomes will continue to be exempt from paying the levy, or pay a reduced rate.

For singles the low-income threshold will rise from $26,000 to $27,222, while the threshold for families will increase from $43,846 to $45,907.

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