Bracketed Tax: A Guide.
Today I learned that not many people (even those around me who study business) actually know how much they get taxed, or how the Australian taxation system works. I’ve heard statements like “if you earn over $80,000, you’ll get taxed 40%, but under $80,000 you only get taxed 30%”.
If this was correct, a person earning $85,000 would take home $51,000, and a person earning $75,000 would take home $52,500. Why on earth would anyone accept a salary in between those two figures? I’ll tell you why. Because that’s not how the system works.
So, how much tax do you really pay? Simplified, your tax payable is equal to income tax minus deductions. Deductions are an individual thing, based on assets, income, dependents, all kinds of things. I’m not going to go into that here. But I will show you how to calculate your income tax.
First of all, you need to understand that your income gets divided up into brackets and each bracket is assigned a tax rate. In Australia, the lowest tax bracket is $0 to $6000, upon which you are not taxed at all. The next bracket starts at $6,001 and goes up to $34,000. This bracket carries a tax of 15%. The last three brackets of $34,001 – $80,000, $80,001 – $180,000 and $180001+ carry taxes of 30%, 40% and 45% respectively.
To calculate your tax, you start with your total gross income. Up to the first $6,000 you’ll pay no tax. For every dollar above $6,000 up to $34,000 you’ll pay just 15% on. Did your income exceed $34,000? By how much? Between $34,001 and $80,000, you’ll have to pay 30%. And so on, and so forth. Money within a bracket is only ever taxed at that bracket’s rate.
I’ve taken the liberty to produce a simple Excel spreadsheet to calculate income tax in Australia. You can download it here. Just enter your taxable income in the top left box and the spreadsheet will tell you how much tax you’re paying inside each bracket. There is a total in the bottom right.
I’ve also included an Effective Rate box. The Effective Rate is is the average rate of tax you’re paying per dollar. For people whose income is reasonably steady, this should give you a far better idea of how much of your weekly paycheck you will have to give up as tax.
I leave it to the reader to figure out their own deductions, payable levies and the like.
In: business · Tagged with: brackets, economics, excel, tax
on March 4, 2010 at 8:09 pm
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It’s a simple concept – I really don’t get why so many people can’t understand it!