For PAYG earners: why $1 is not a full deduction
A common misconception is worth setting straight. This piece is about PAYG Withholding — the tax an employer withholds from your wages before paying you — which is distinct from the PAYG Instalments system covered in this month's companion article.
The misconception runs like this: I earn $80,000, I'm in the 30% tax bracket, so a $100 donation "gets me $100 back." Or a $2,000 self-education course "costs me nothing" because it's deductible. The conclusion feels intuitive, and it is wrong. The mistake it introduces into personal financial decisions can be material.
What a deduction actually does
A tax deduction reduces your taxable income. It does not reduce your tax payable by the deduction amount. The distinction matters.
Taxable income is calculated as your gross assessable income minus allowable deductions. Your tax is then applied to the reduced figure using Australia's marginal tax brackets. A deduction therefore removes the deducted amount from the top of your income — the portion taxed at your highest marginal rate.
The tax you save from a deduction is equal to:
Deduction amount × your marginal tax rate (plus Medicare Levy)
Nothing more.
The 2025-26 marginal rates
For Australian residents, the rates for the year ending 30 June 2026 are:
$0 – $18,200 — 0% marginal rate, 0% including Medicare Levy
$18,201 – $45,000 — 16% marginal rate, 18% including Medicare Levy
$45,001 – $135,000 — 30% marginal rate, 32% including Medicare Levy
$135,001 – $190,000 — 37% marginal rate, 39% including Medicare Levy
$190,001 and above — 45% marginal rate, 47% including Medicare Levy
Medicare Levy applies on top for most working-age residents. A deduction therefore saves you between 18 and 47 cents in the dollar depending on where the top of your income sits — not the full dollar.
What this looks like in practice
Consider four PAYG earners, each making a $500 tax-deductible donation to a registered charity in the 2025-26 year.
Anna earns $60,000. Her top marginal rate is 30% plus 2% Medicare Levy — 32% in total. The $500 donation reduces her tax by $160. The donation costs her, in after-tax terms, $340.
Sam earns $120,000. Same bracket. The donation still reduces his tax by $160. The after-tax cost is the same $340.
Chloe earns $160,000. Her top marginal rate is 37% plus 2% Medicare Levy — 39%. The $500 donation reduces her tax by $195. After-tax cost: $305.
Daniel earns $220,000. His top marginal rate is 45% plus 2% Medicare Levy — 47%. The donation reduces his tax by $235. After-tax cost: $265.
In no case does the donation return a full dollar to the donor. The highest earner captures the largest deduction benefit — but still bears more than half the cost personally.
Where the misconception matters most
The distinction between voluntary and necessary spending is where the assumption of full deductibility does the most damage.
Voluntary spending — donations, self-education courses, discretionary work-related expenses, personal deductible super contributions. Here, the after-tax cost is what actually leaves the household. A $2,000 professional course is not "free because it's deductible." At a 30% plus 2% marginal rate, it costs $1,360 out of pocket. That is the number to weigh against the value of the course.
Necessary spending — required tools, protective clothing, work-required travel, mandated licences. The deduction reduces a cost you had to incur anyway. The relevant question is not whether the expense was worthwhile — you had no choice — but whether you have captured the deduction correctly.
Investment-related spending — interest on borrowings used to acquire income-producing assets, professional advice on investments, other deductible investment expenses. The deduction is not the reason to hold the underlying investment. If an investment only makes sense because of its deduction, it usually does not make sense.
Two additional points
Deductions can span brackets. A large deduction may straddle a bracket boundary — reducing the top portion of income at 37%, and the next portion at 30%. The average benefit in such cases sits between the two marginal rates.
Not every tax concession is a deduction. Franking credits on Australian share dividends reduce tax payable directly. Offsets — such as the Low Income Tax Offset — apply against your tax liability, not your taxable income. Both are sometimes described as deductions in general conversation, but they operate through a different mechanism.
The principle
A deduction is not a rebate. It is a reduction in the income against which tax is calculated. The size of the benefit depends on where your top dollar of income sits within the marginal brackets — nothing more.
Personal financial decisions built on the belief that a deduction returns the full dollar spent are decisions built on a wrong number. The disciplined approach is to work out the actual after-tax cost before committing the money, not after the return has been lodged.
If you would like to review whether the deductions you have claimed — or plan to claim — are being calculated correctly against your marginal rate, we welcome the conversation.
Corinne Kirk
Partner, Accountant
1300 102 542 | 0405 106 401
corinne@egu.au
Sources
Australian Taxation Office — Individual income tax rates and thresholds (2025-26): https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents
Australian Taxation Office — Medicare Levy: https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy
Australian Taxation Office — Deductions you can claim: https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim
This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.