Budget 2020 income tax cuts: How much will you save?
The government will bring forward personal tax cuts that will see Australian workers save up to $2,565 in tax this financial year.
After widespread speculation, the government has confirmed its income tax cuts as part of its 2020 Federal Budget revealed on 6 October. The tax cuts, originally planned for 2022, will be brought forward to the current financial year. This means that the tax cuts originally scheduled to take place two years from now will be brought forward and backdated to 1 July 2020.
How much will I save in tax?
Workers will receive a tax cut of $255 to $2,565 depending on their annual salary or wages. Those who earn $120,000 or more over the year will receive the biggest tax cut of $2,565 (they'll also still pay the most income tax). Middle income earners with annual salaries between $45,000 and $90,000 will get a $1,080 tax cut.
Income tax cuts 2020
|Annual salary||Tax cut for the 2020-21 financial year|
|$20,000||No tax payable|
This will be done by adjusting the income tax brackets. Currently, workers earning up to $37,000 pay 19 cents in tax for each $1 over $18,200. This tax bracket will be increased to include those earning up to $45,000 a year. This means those earning between $37,001 and $45,000 will stay in the 19-cent tax bracket instead of being bumped up to the next bracket, which is taxed at $3,572 plus 32.5 cents for each $1 over $37,000.
Similarly, the upper limit of this 32.5-cent income bracket will be lifted from $90,000 to $120,000.
When will I get this tax back?
You could start to see a bit more money in your pay packet before Christmas.
As the tax cut will be applied to the 2020-21 financial year, if you're eligible for a tax cut, it'll be backdated to 1 July 2020. This means the amount of income tax withheld on your pay will be slightly less for the remainder of the year, and you'll take home slightly more money as a result.
For example, if you're entitled to a $1,080 tax cut, this works out to be a saving of $20.77 each week over the course of the year. However, if this tax cut is applied a few months late from 1 November, then there are only 35 weeks left in the financial year, which means you'll see an extra $31 or so in your weekly take-home pay.
Why is the government announcing tax cuts?
Australia is in its first recession in decades (here's how to manage your money during a recession if you're looking for some tips). One key trend that happens in a recession is consumer spending slows down as people hold onto more of their money or simply don't have money to spend due to loss of work. However, with less of us out there spending money, the economy only gets worse. It's a vicious cycle.
With a bit more money in our pockets each payday, the government hopes these tax cuts will entice Australian workers to spend money and help boost the economy.
What to do with your tax cut
If you're expecting a tax cut this year and aren't planning to hit the shops, here are a few ways you could put it to good use:
- Make an extra repayment on your home loan.
- Put the money in your mortgage offset account, so you pay less interest against your home loan.
- Open a high interest savings account or term deposit.
- Buy some shares or an index fund.
- Top up your superannuation by making an extra one-off contribution (this could be especially beneficial if you withdrew money from your super this year).
And if all this talk of tax has reminded you about your 2019-20 tax return, you've only got until 31 October to lodge it with the ATO unless you register with a tax agent or accountant before then.