How bracket creep is costing you more money each year

A wage rise is always welcome news. But often it doesn't end up being as good as it initially seems due to bracket creep.

As an employee's income rises in line with inflation, they can end up paying more tax as a result of 'creeping' into a higher tax bracket.

For instance, someone earning $45,000 a year pays 16 cents tax for each $1 over $18,200, or a total of $4288 (not including Medicare).

If they received a 3% pay rise to keep up with inflation, perhaps mandated in an industrial award, they would receive an extra $1350 before tax. And that extra income would push them into a higher tax bracket, so they would pay 30% tax on that extra money - almost twice as much.

The issue for policymakers and economists is that the person isn't earning more once inflation is taken into account, but they are paying more tax, so they end up worse off.

Over the 12 months to December 2024, private sector wages grew an average of 3.3% and public sector wages rose 2.8%, according to the Australian Bureau of Statistics. These pay rises are even more modest once inflation is taken into account. Over the same 12 months, the consumer price index (CPI) rose 2.4%.

And while circumstances vary from individual to individual, workers are often a little worse off in real terms, that is, after adjusting for inflation.

A little extra tax on a small amount of income might not seem significant, but if this happens several years in a row, it can erode a taxpayer's real income and standard of living.

How paying more tax adds up

There's also a second way that bracket creep affects a worker's take-home pay. Even if they don't jump from one tax bracket to another, they end up paying a larger portion of their money in tax.

For instance, if someone is earning $60,000, their top tax rate is 30% in 2024-25. Their total tax bill is $8788, which is equivalent to 14.6% of their income.

If they received a 3% pay rise to compensate for inflation, their pay would rise to $61,800 and they would remain in the same tax bracket. They would pay $9328 in tax, equating to 15.1% of their income.

This, too, might look like a small amount, but it can add up to something more significant.

Ben Phillips, associate professor at the Australian National University's Centre for Social Research and Methods, notes that bracket creep is more punitive for people on lower incomes.

"If you were on, say, $18,200, you're currently paying no tax. But as your income increases - just because wages increase slowly over time - you would start to pay tax. You'd go from paying no tax to, five years down the track, a couple of thousand dollars. As a share of your income, that's really substantial," says Phillips.

If someone on, say, $300,000 received an inflation-linked pay rise, they would stay in the same marginal tax bracket (45% above $190,000) but would pay a slightly higher share of their income overall.

The increase in tax would be comparatively small and less likely to be noticed by the taxpayer.

"A dollar to a low-income person is worth a lot more than a dollar to a high-income person," says Phillips.

Additionally, retirees generally aren't hit by bracket creep because they're not earning much, if any, income.

Repairing the Budget

The amount of extra tax an individual taxpayer pays after a year or two of bracket creep might not be much on its own, but for all taxpayers it adds up to a large pot of money for government coffers.

The Parliamentary Budget Office (PBO) says bracket creep will have an important role to play in repairing the Budget and reducing government debt.

PBO research shows that if the then Morrison government hadn't introduced the Stage 3 tax cuts, bracket creep would have raised an additional $276 billion, or 8.1% of GDP, in the decade to 2031-32.

The research is from late 2021, so is no longer current, but it gives an idea of the hundreds of billions of dollars available to governments that don't adjust tax rates.

In this way, bracket creep is politically expedient. It's always unpopular for a government to increase taxes, so it's much easier to sit back and let inflation do the hard work.

Along with being a painless way to raise income tax revenue, bracket creep also provides governments with more flexibility on fiscal policy. In an inflation outbreak, for instance, bracket creep allows the government to cool the economy by taking out more cash via a larger tax take.

Governments can also gain political capital by announcing income tax cuts, even if they are just returning bracket creep and the taxpayer isn't taking home any more money in real terms than they were a couple of years ago.

The tax cuts introduced by the Albanese government in its March 2025 Budget are the most recent example. A worker on average earnings of $79,000 will get a tax cut of $268 in 2026-27 and $536 a year from 2027-28, compared with 2024-25 tax settings. This only slows down bracket creep for a couple of years, however.

Analysis by economist Chris Murphy, a visiting fellow in economics at the Australian National University, suggests bracket creep is increasing.

In the first two decades of this century following the introduction of the GST, governments took an average of 22.9% of Australians' incomes in tax. The rate moved up and down from year to year as bracket creep took effect and governments cut tax rates, creating a jagged, sawtooth pattern.

But Murphy says that since then tax cuts haven't been giving back all the bracket creep increases and so the total tax take has risen to 24.3% in the current financial year. Without further tax cuts, it will rise to 28.1% by 2035-36.

"There might be further tax cuts in the future, but on the other hand there might not be, given that we have started to see this upward trend and that the Budget includes a projection that it will get back into balance in 2035-36, 11 years into the future," says Murphy.

"But that's only on the assumption that bracket creep is not returned."

And because bracket creep hits low-income earners harder, it means Australia's tax system is becoming less equal, he says.

Bracket creep surfaced as an issue in this year's Federal election, with then Opposition leader Peter Dutton describing it as a "killer in the economy" that stifles productivity, entrepreneurialism and hard work.

How to deal with bracket creep

Indexation is about the only practical solution to bracket creep, but it isn't an idea that politicians are clamouring to adopt.

And the ANU's Ben Phillips says governments in effect do index tax rates, but do so on an ad-hoc basis. He notes there have been 20 income tax cuts in the past 40 years.

Australia isn't alone in suffering from bracket creep.

The UK froze income tax thresholds in 2021-22 and this has resulted in a sharp increase in the number of taxpayers in the highest tax band of 45%, from 4.4 million to 6.3 million, according to an analysis by the accounting firm RIFT.

It says that bracket creep has been "particularly punitive" in recent years as inflation in the UK hit double digits in 2022 and 2023.

In Australia, Mark Chapman, director of tax communications at H&R Block, says a lot of taxpayers are subject to bracket creep, but most don't notice it.

"It's not until it's pointed out to them - which the media is very good at doing - that taxpayers really notice," he says.

Chapman sees bracket creep as punitive. For instance, the top tax rate for someone earning $130,000 is 30%. But a couple of years of 3% pay rises would push their income over $135,000 and they would pay a top tax rate of 37%.

"You haven't actually done anything to deserve that," he says.

"You haven't got a promotion or anything. You haven't got a better job. You're simply doing the same job you've always been doing. But now you're suddenly paying tax at 37% on some of your income rather than just 30%," he says.

Chapman suggests a couple of things taxpayers can do to mitigate bracket creep.

The first is to ensure they claim all the deductions they're entitled to, noting that large numbers of taxpayers fail to do this.

The second is salary sacrificing to reduce taxable income, for example, by putting pre-tax money into a superannuation fund or towards the purchase of a vehicle.

How inflation takes its toll

Bracket creep hits people on low incomes harder than those on high incomes. And it has a disproportionate impact on those whose need for cash is highest.

As such, its biggest effect is on millennials (1980-1994) and gen Z (1995-2012) who are starting their careers and probably earning less.

The examples below assume an inflation rate of 3% and that wages rise by the same amount. While the real-world economy is rarely so neat, they are nonetheless illustrative of the effects of bracket creep.

Gen Z worker
Annual income $67,000

Australians aged 21 to 34 years of age earn an average of $1289.20 a week, or $67,038 a year, according to the Australian Bureau of Statistics in 2024. The figure includes full-time and part-time work.

A worker earning this amount would pay just under $11,000 in tax, calculated at the tax rates for 2024-25, excluding Medicare.

If this worker received two 3% pay rises over two years, their total income would rise to $71,120 and they would pay $12,124 in tax.

So, after the two pay rises, they would receive $1134 in the hand each week. Two years earlier they were receiving $1078.

That's an extra $56 a week, which sounds as if it could be useful.

But if inflation rises by 3% - the same as their wage - then they would need to receive $1144 in the hand just to have the same spending power.

The effect of bracket creep means that they are $10 a week worse off, despite receiving two pay rises and despite staying in the same marginal tax bracket.

Annual income $45,000

For those whose wage rises push them into a new tax bracket, the effect of bracket creep is even greater.

A worker earning an annual income of $45,000 pays $4288 in tax and pays a top tax rate of 16%. If they receive two annual 3% pay rises, as for the worker earning $67,000pa, their pay will rise to $47,730 and they'll pay $5107 in tax.

Their after-tax weekly income would rise from $783 to $820 - a useful $37 for someone on a relatively modest income.

However, to keep up with two years of 3% inflation they would need to have received $831 in the hand. It means that they are, in fact, $11 a week worse off.

Millennial worker
Annual income $112,710

The average pay for a full-time worker aged 34 to 44 years - someone in the millennial age group - is $112,710 a year. They would pay $24,601 in tax.

If they received two 3% pay rises, their pay would be $119,574 and they would lose $26,660 in tax. Their take-home pay would rise from $1694 to $1786 a week.

This is an extra $92 a week, which could be very useful for a millennial struggling to pull together a home deposit or meet high mortgage repayments, as well as possibly paying school fees.

But, once again, inflation has its corrosive effect. To keep up with 3% inflation, their weekly pay would need to be $1797. They, too, end up $11 worse off.

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