Inflation Just Hit 4.3%. Here's How Bracket Creep Quietly Eats Your Pay Rise
Prices are up 4.3%, but Australia's tax brackets don't move with inflation. Here's what bracket creep costs on a typical pay rise, with real numbers.
On 28 October the Australian Bureau of Statistics (ABS) reported that prices rose 4.3% over the year to September 2026, up from 4.0% in August. Housing and fuel did most of the pushing. Underlying inflation (the trimmed mean, which strips out the biggest price jumps and falls) came in at 3.6%.
Most of the coverage has been about what this means for interest rates, with the Reserve Bank's next decision due on Tuesday 3 November. But there's a quieter cost of high inflation that hits almost every PAYG worker, whether or not you have a mortgage. It's called bracket creep, and it's worth five minutes to understand, especially if you're about to ask for a pay rise.
What bracket creep actually is
Australia's income tax brackets are set in dollars, and they are not automatically adjusted for inflation. The tax-free threshold has been $18,200 since 2012-13. The current bracket edges of $45,000, $135,000 and $190,000 have been in place since 1 July 2024.
So when your pay goes up just to keep pace with rising prices, more of your income ends up in the higher brackets, even though your actual buying power hasn't improved. You're not richer, but the tax system treats you as if you are. That gap between "more dollars" and "more stuff those dollars can buy" is bracket creep.
- $0 to $18,200: no tax
- $18,201 to $45,000: 15% (down from 16% on 1 July 2026)
- $45,001 to $135,000: 30%
- $135,001 to $190,000: 37%
- Over $190,000: 45%
Worked example: a 4% pay rise
Jess earns $80,000 a year. To roughly keep up with prices, her employer gives her a 4% pay rise, taking her salary to $83,200. Here's how that looks using the 2026-27 tax rates, plus the 2% Medicare levy.
On $80,000, Jess pays $14,520 in income tax and $1,600 in Medicare levy, so $16,120 in total. Her take-home pay is $63,880.
On $83,200, she pays $15,480 in income tax and $1,664 in Medicare levy, so $17,144 in total. Her take-home pay is $66,056.
Her salary went up 4%, or $3,200. Her tax bill went up $1,024, which is about 6.4%. Her take-home pay went up $2,176, which is only about 3.4%. Every extra dollar she earns is taxed at 32 cents (30% plus the 2% Medicare levy), so the tax grows faster than the pay.
If the brackets had also risen by 4%, Jess's income tax on $83,200 would have been about $15,101 instead of $15,480. That $379 is what bracket creep cost her in a single year. It doesn't vanish next year either: without changes to the brackets, it builds on itself every year wages rise.
And if prices keep rising at 4.3%, Jess would need about $66,627 in take-home pay just to stand still. Her raise gets her to $66,056, so she is around $570 a year behind in real terms, even after a pay rise that sounded fair.
The trap: a raise that matches inflation doesn't keep you level
Because tax brackets don't move, a pay rise equal to inflation still leaves you slightly worse off after tax. If you want your take-home pay to keep up with prices, your gross pay rise needs to be a bit higher than the inflation rate. Compare offers in after-tax dollars, not headline salary.
Don't fear the next bracket, though
Bracket creep is real, but it's often confused with a much bigger myth: that moving into a higher bracket means all your income gets taxed at the higher rate. It doesn't. Only the dollars above each threshold are taxed at the higher rate.
Say you earn $134,000 and get a $2,000 raise to $136,000. The first $1,000 is taxed at 30% and only the last $1,000 at 37%. That's $670 in extra income tax plus $40 in Medicare levy, so you keep $1,290 of the $2,000. You will never take home less money because of a pay rise that pushes you into a higher bracket.
How the government hands it back
Instead of indexing the brackets every year, governments tend to return bracket creep in occasional tax cuts. Some are already locked in by law:
- The 15% rate that started on 1 July 2026 (down from 16%) is worth up to $268 a year.
- From 1 July 2027 that rate falls again to 14%, worth up to another $268 a year.
- A new $1,000 standard deduction for work-related expenses applies from the 2026-27 income year, so it shows up on the return you lodge from July 2027, not the one you're lodging now.
- A $250 Working Australians Tax Offset is due to start from the 2027-28 income year.
Reality check
These cuts help, but they are fixed dollar amounts. Bracket creep keeps growing each year that wages rise and the brackets stay put, which is why the benefit of any tax cut tends to shrink over time.
What you can actually do
You can't change the brackets, but you can make sure bracket creep doesn't catch you off guard:
- Before a pay review, work out your after-tax pay at both your current and proposed salary. Our Tax Calculator does this in a few seconds.
- Measure any raise against inflation in take-home terms. A 4% raise on $80,000 is about 3.4% in your pocket.
- If a raise pushes you near the $135,000 threshold, salary sacrificing into super can be worth a look. Those contributions are generally taxed at 15% in the fund instead of your 37% rate, but the money is locked away until retirement and the concessional cap still applies.
- Keep records of your work expenses. Deductions reduce your taxable income at your top rate, so they partly offset the creep.
This is general information only, not tax advice. Rates used are for the 2026-27 income year for Australian residents. For your own situation, speak to a registered tax agent.
FAQ
Are Australian tax brackets indexed to inflation?
No. Income tax thresholds are set in dollar terms and only change when the government legislates a change, such as the Stage 3 tax cuts in July 2024 or the 15% rate from July 2026. Some other thresholds, like the Medicare levy low-income threshold and the super contribution caps, are indexed.
Can a pay rise make me worse off after tax?
No. Only the dollars above each threshold are taxed at the higher rate, so a pay rise always increases your take-home pay. What bracket creep does is make your take-home pay grow more slowly than your gross pay, which matters when prices are rising.
How much does bracket creep cost on an $80,000 salary?
With a 4% raise to $83,200 in 2026-27, income tax rises by $960 to $15,480. If the brackets had risen by 4% too, it would have been about $15,101, so bracket creep costs around $379 that year, before the 2% Medicare levy.
Run your own numbers