PAYG Withholding
The system where employers withhold income tax from employees' wages and remit it to the ATO throughout the year.
Pay As You Go (PAYG) withholding is the system under which employers, and other payers, deduct income tax from payments they make to employees, contractors (who don't quote an ABN), and other recipients. The withheld amounts are sent to the ATO, usually quarterly via the Business Activity Statement (BAS). This ensures tax is collected progressively throughout the year rather than as a lump sum at year-end.
The amount withheld is calculated using the ATO's withholding tables, which factor in the tax-free threshold (if claimed), the Medicare levy, and any adjustments for HELP/HECS debt repayments. Your employer reports your total income and tax withheld on an income statement (formerly called a payment summary or group certificate), which is accessible through myGov from mid-July each year.
If too much tax has been withheld during the year (e.g., because you have deductions to claim), you'll receive a refund when you lodge your tax return. If too little was withheld (e.g., because you have multiple jobs or investment income), you'll have a tax debt to pay. You can use a PAYG withholding variation if you want your employer to withhold less tax because you expect to have significant deductions.
How it works
PAYG withholding is the system that has your employer, or another payer, deduct an estimate of your income tax directly from each payment, rather than leaving you to pay the whole year's tax in one lump sum after lodging a return. The employer sends the amounts withheld to the ATO, typically as part of their regular activity statement lodgements, so tax is collected progressively across the year in step with when you actually earn the income.
You see this every payday on your payslip, where gross pay minus tax withheld equals your net pay. The amount withheld is worked out from the ATO's withholding tables, which factor in whether you've claimed the tax-free threshold, the Medicare levy, and any HELP or HECS debt repayment obligations. At the end of the year, your employer's total withheld amount appears on your income statement in myGov, ready to be matched against your actual tax liability.
PAYG withholding is only ever an estimate — it's not your final tax bill. If it turns out too much was withheld relative to your actual liability, common if you have deductions to claim, you get the difference back as a refund; if too little was withheld, common with multiple jobs or extra investment income not accounted for in any single employer's withholding, you end up owing more at tax time. You can apply for a PAYG withholding variation if you expect significant deductions and want less withheld throughout the year instead of waiting for a refund.
Example: PAYG withholding on a fortnightly pay
Suppose your gross pay for a fortnight is $2,000, and based on the ATO's withholding tables — factoring in that you've claimed the tax-free threshold with this employer — your employer withholds $350 in tax from that pay.
Your net pay for the fortnight is $2,000 minus $350, which comes to $1,650 landing in your bank account. Over the course of the year, all those fortnightly withholding amounts add up and are reconciled against your actual tax liability when you lodge your return — if the running total of withholding turns out higher than what you actually owed, the difference comes back as a refund.
Related Terms
Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Tax-Free Threshold
The first $18,200 of annual income that is not subject to income tax for Australian residents.
Business Activity Statement (BAS)
A form lodged with the ATO to report and pay GST, PAYG withholding, PAYG instalments, and other business tax obligations.
Tax Return
An annual form lodged with the ATO reporting your income, deductions, and tax payable or refundable for the financial year.
PAYG Instalments
Regular prepayments of tax on business or investment income that doesn't have tax withheld at source.