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What Is the NBA’s Luxury Tax and How Does It Work?

Originally posted on Athlon Sports | By Eric W. Bolin | Last updated Feb 28, 2026 2:36 PM ET

Of the four big professional sports leagues in North America, none has a more confusing financial setup than the NBA.

And while a bachelor's degree in accounting helps understand, the most fervent NBA fans without such schooling can often explain it to the layperson. In other words, while yes, it's complex, think about it the same way you think about your taxes and things become somewhat clearer.

NBA's Salary Cap

Unlike Major League Baseball, the NBA has a salary cap; it just isn't what is defined as a hard cap, meaning teams are free to go over "maximum" if they're willing to pay additional taxes -- a luxury tax -- for doing so.

For the 2025-26 season, the league set that maximum at $154.6 million. Teams that choose to go above it suffer financial penalty. The league also sets a cap floor (minimum), and for the '25-26 season, it was $139.2 million

When a season begins, teams are put into tiers based on their payroll, much like how Americans fall into tax brackets. It's not exactly the same, but it's the metaphor we're using, anyway. Let's examine the tiers and what effects they have.

1) Teams under the cap of $154.6 million
2) Teams above cap but under the luxury tax threshold of $187.9 million
3) Teams above tax threshold but under first bracket (called aprons in the NBA) of $195.9 million
4) Teams above the first apron but below the second apron of $207.8 million
5) Teams above the second apron of $207.8 million

1) Under the Cap

Phoenix Suns guard Devin Booker.© Mark J. Rebilas-Imagn Images

As long as a team is above the salary floor, they're welcome to stay under the salary cap as long as they like without financial penalty. Of course, this means they likely won't field as competitive a roster as others who choose to go above the cap and into luxury tax territory, though financial shrewdness helps.

Teams in this tier can sign non-rostered players without the use of salary-cap exemptions, and in trades they can take on salary to the point of reaching the cap. Once they've hit the threshold, they bump to the next tier.

2) Between the Cap and Luxury Threshold

In 2025-26, most teams live in this tier or the next. As of March 1, 2026, 22 franchises slotted here. They have access to the non-taxpayer mid-level exception. That allows a team to sign players for about 9.1% of the salary cap. The non-taxpayer mid-level exception allows teams to add to their roster via signing or trade.

Teams here can also use the bi-annual exception. It's used for contracts up to a maximum of two years in length.

3) Between the First Apron and Second Apron

Minnesota Timberwolves guard Anthony Edwards reacts during a game against the New Orleans Pelicans at Smoothie King Center.Matthew Hinton-Imagn Images

The biggest difference between this tier and the previous is that teams in this zone can access to the taxpayer mid-level exception. In 2025-26, it's worth about 40% of the non-taxpayer mid-level exception. The former maxed out at about $14.1M per year, whereas the mid-level exception in this tier maxes at around $5.7 million per year.

Teams here can also use the bi-annual exception, but because of their status as luxury taxed, those deals can sometimes lift the team into the next tier. As of March 1, 2026, two teams slotted here.

4) Teams Between NBA First Tax Apron and Second Tax Apron

Most teams don't want to be here as getting to this tier prohibits a team from having access to a mid-level exception or a bi-annual exception. Basically, they can't sign non-rostered players for anything other than the veteran minimum salary.

This tier also limits their trading ability as they have to nearly match salaries exactly. Two teams are slotted here as of March 1, 2026.

5) Teams Above NBA Second Tax Apron

Only one team had met this threshold as of March 1, 2026. The punishment is stiff as teams here can't aggregate salaries for matching purposes in a trade, which means basically have to make one-for-one or two-for-two trades or the like.

They suffer all the same restrictions as the previous tier, too, and also can't send cash to another team in a trade.

How massive is the tax difference between the top three tiers? Well, as of March 1, 2026, this was each team's estimated tax bill, according to Spotrac: