Why Overtime Seems Taxed More in Australia (It Is Usually Withholding)

General information only.

There is no special overtime tax rate in Australia. Overtime is taxed at exactly the same rate as your ordinary income — your marginal rate. What you are seeing on your payslip is a higher PAYG withholding estimate for that pay period, not a permanent surcharge on overtime earnings.

At the end of the financial year, everything is reconciled. Your total tax is calculated on your full-year taxable income regardless of how it was earned. If too much was withheld, you receive a refund. If not enough was withheld, you pay the difference.

Why the payslip looks wrong

The ATO’s PAYG withholding system works by annualising your pay. Each fortnight, your employer’s payroll software looks at what you earned that period and assumes you will earn the same amount every fortnight for the full year. It then calculates the annual tax on that projected income and divides by 26 to arrive at the withholding amount for that period.

This works fine when your pay is consistent. It creates a mismatch when your pay fluctuates — as it does with overtime.

Here is the mechanics:

• Normal fortnightly gross: $1,500 → annualised = $1,500 × 26 = $39,000 → tax on $39,000 ≈ $4,992 per year → withholding per fortnight ≈ $192
• Fortnight with $500 overtime: $2,000 gross → annualised = $2,000 × 26 = $52,000 → tax on $52,000 ≈ $8,092 per year → withholding per fortnight ≈ $311

The extra $500 in overtime generates an extra $119 in withholding — an apparent rate of 23.8% on the overtime amount alone, even though your actual marginal rate on that income is around 30% (which would be only $150 in actual marginal tax on $500).

Wait — why is the withholding rate lower than the marginal rate in this example? Because in the annualised calculation, the payroll tables are distributing the benefit of the tax-free threshold and lower brackets across the whole year. At an annualised $52,000, you still benefit from the $18,200 tax-free threshold and the 16% bracket up to $45,000. The marginal rate applies only on the top slice.

Worked example: overtime in a single fortnight

Employee background:

• Annual salary: $78,000 (fortnightly base: $3,000)
• Normal fortnightly withholding: ~$658
• Annual tax on $78,000: ~$17,128 (income tax) + $1,560 (Medicare) = $18,688

One fortnight with $800 overtime:

• Fortnightly gross: $3,800
• Annualised income (for withholding purposes): $3,800 × 26 = $98,800
• Annual tax on $98,800: ~$23,953
• Fortnightly withholding: $23,953 ÷ 26 = ~$921

Withholding that fortnight: $921 vs normal $658 — an extra $263 withheld.

But the actual marginal tax on $800 overtime for someone at $78,000 annual income is: $800 × 30% + $800 × 2% = $240 + $16 = $256 in actual tax.

The withholding was $263, just $7 more than the actual tax owed on the overtime. At the end of the year, when real tax is calculated on total income ($78,000 + $800 = $78,800), any over-withholding across the whole year is refunded.

The key point: The $263 withheld that fortnight is not a permanent extra tax on overtime — it is a cash flow timing effect that resolves at tax time.

When total withholding is too high

Because high-overtime periods cause over-withholding relative to other periods, workers with irregular overtime often receive a tax refund when they lodge their return. The ATO has withheld slightly too much across the year (by treating each high-pay fortnight as a whole-year projection), and the refund corrects for this.

This is the mechanism behind the common experience: “I work a lot of overtime and I always get a big refund.” The refund is simply the overpaid PAYG being returned after actual annual income is confirmed.

When you might not get a refund

If you work significant overtime consistently throughout the year, the annualisation in each period becomes more accurate and overpayments are smaller. In this case, your actual annual income reflects the annualised projections more closely, and there is less over-withholding to refund.

Also, if you have other taxable income — investment income, rental income, a second job — your total annual income may be higher than your employer’s payroll software expects. In that case, you could owe more at lodgment rather than receiving a refund. The PAYG withheld by your employer is just one piece of your total tax picture.

Can you reduce the withholding on overtime?

Not directly. Your employer must use the ATO’s prescribed withholding schedules and cannot selectively apply a different rate to overtime income. However, if you consistently receive overtime and find the resulting over-withholding is tying up your cash flow, you can apply to the ATO for a PAYG withholding variation. This allows your employer to withhold a lower amount each period based on an accurate projection of your annual income and deductions.

To apply, use the ATO online services (via myGov) or submit a NAT 0927 variation notice to the ATO. You will need to estimate your total expected income and deductions for the year.

Common misconceptions

“Overtime is taxed at 47%.” This is a myth. No income in the ordinary resident tax system is taxed at 47% unless it relates to excess concessional super contributions or certain trust distributions. The top marginal rate for regular income is 45%, and that only applies above $180,000. The impression of very high taxation on overtime is a withholding artefact.

“I should refuse overtime because I’ll keep nothing.” This is never mathematically true. Even at the highest marginal rate of 45% (for income above $180,000), you keep 55 cents of every extra dollar earned. For most workers earning below $135,000, the marginal rate on overtime is 30-32% combined — you keep at least 68-70 cents.

“My employer is pocketing the extra withholding.” Withholding goes directly to the ATO on your behalf. It is credited against your tax liability at year end. If over-withheld, you receive the difference as a refund when you lodge your return.

Check your own withholding

Use the PAYG Calculator to see how different fortnightly amounts affect withholding at your income level. Use the Income Tax Calculator or Tax Return Calculator to estimate your full-year tax and compare with total withholding to forecast whether you will owe more or receive a refund.

Source

• ATO PAYG withholding schedule and tax tables
• ATO resident tax rates 2025-26
• ATO PAYG withholding variation
• ITAA 1997, s 4-10 and Schedule 1, Div 12 (PAYG withholding framework)