You got a new job (congrats!) and now you have to fill in your Tax File Number (TFN) Declaration. You get to the Tax-Free Threshold question and wonder what is the Tax Free Threshold?
Don't worry – we'll keep this friendly and easy to understand. Whether you've just landed your first job or you're a seasoned earner, knowing about this important tax term can make all the difference come tax time.
What is the Tax Free Threshold?
In plain English, the Tax Free Threshold is the amount of money an Australian resident can earn before you start paying tax. Currently in Australia you can earn $18,200 tax free.
If that is all you earn you won't pay any tax. If you earn more than that, you will only pay tax on the amount you earn above this threshold.
Simple right? But what does that mean in practical terms?
How does it work?
Every time your employer pays you they calculate how much tax they need to withhold on your behalf. When you start a new job, you tell your employer the information they need in order to do this calculation by completing the TFN Declaration. One of these questions is if you would like to claim the tax free threshold. If you say yes, your employer knows not to withhold tax from your pay for the first $18,200 you earn.
It is important to note, that is not literally the very first $18,200 you earn that is tax free. That amount is calculated per pay period. For example, if you get paid weekly, that amount is $350 per week. Therefore, $350 will be tax free in your pay. They work it out so each pay check in the year withholds a similar amount of tax.
The withholding of tax is called Pay As You Go (PAYG) Withholding. You can check if your employer is withholding the correct amount of tax from your pay by using the ATO Tax withheld calculator.
What if you have multiple jobs?
If you have more than one job at the same time, you should claim the Tax Free Threshold from the job that pays the most. If you claim from multiple jobs, you will get more money in your pay check, but you will likely end up with a tax debt at the end of the year. No one wants that surprise!
What if I change jobs?
If you change jobs in the middle of the tax year, you should claim the Tax Free Threshold in the new job. As we explained earlier, the threshold is calculated per pay period, so if you are no longer claiming the threshold with the previous employer, claim it with the new one.
What happens if I don't claim the Tax Free Threshold?
If you choose not to claim the Tax Free Threshold, your employer will withhold tax based on the entire amount. Some people do this as a way to guarantee that they will have a tax return at the end of the year. Others have so many side gigs and investments, that they do this to avoid a massive bill at tax time.
But the important thing to know is that this is just a temporary withholding. It doesn't mean you are paying more taxes. You will only know your full tax bill once you lodge your tax return.
Why is the Tax Free Threshold important?
Understanding how the tax free threshold works can help you make smarter financial decisions. While it is especially helpful for part-time workers, students, or anyone with a lower income because it can mean paying no tax at all, it can also be helpful if you are on a high income with multiple income streams.
If you have multiple separate incomes, each of them may withhold tax based on the Income Tax Rate of that individual pay check. But all of them combined may push you to another tax bracket, meaning your employers are not withholding enough tax.
You can either request from your employer to withhold more tax, or not claim the tax free threshold from any employer. This will help ensure they are withholding enough for your tax bill.
Finding more information and getting help
For more detailed information, you can always visit the ATO website. They have a wealth of resources about the Tax-Free Threshold.
If you need more than what's online, get in touch with us. Beyond tax returns, we offer guidance on managing your taxes and planning ahead.
We're here to do more than file your taxes; we aim to help you grasp tax principles and make informed decisions throughout the year. This way, you can approach the end of the financial year with confidence, knowing you're on top of your tax situation.