PAYG - Pay As You Go (Australia)

Australia's system where employers withhold income tax from employee wages each pay cycle and remit it to the Australian Taxation Office (ATO), ensuring workers pay their tax obligations progressively throughout the year rather than in a lump sum.

What Is PAYG Withholding in Australia?

Key Takeaways

  • ✓PAYG withholding is Australia's tax collection system where employers deduct income tax from employee wages each pay cycle and send it to the Australian Taxation Office (ATO).
  • ✓The system collected AUD 285 billion in FY2022-23, making it the federal government's single largest revenue source (ATO Annual Report).
  • ✓Employers use ATO-published tax tables (updated annually) or the ATO's online tax withheld calculator to determine the correct withholding amount for each employee.
  • ✓PAYG withholding applies to wages, salaries, commissions, bonuses, directors' fees, retirement payments, and payments to certain contractors who don't quote an ABN.
  • ✓Failure to withhold or remit PAYG amounts can result in the director personally becoming liable for the unremitted tax under the Director Penalty Notice regime.

PAYG withholding replaced the old PAYE (Pay As You Earn) system on July 1, 2000, as part of the introduction of the GST and broader tax reform. The concept is the same: instead of employees receiving their full gross pay and then paying a large tax bill at year-end, the employer withholds an estimated tax amount from each pay and sends it to the ATO. At the end of the financial year (June 30), the employee lodges a tax return. The ATO compares actual tax owed against total PAYG withheld. If too much was withheld, the employee gets a refund. If too little, they owe the difference. For employers, PAYG withholding is a trust obligation. The amounts withheld are legally the ATO's money from the moment they're deducted. Using withheld PAYG funds for business cash flow is a serious offense that can lead to criminal prosecution and personal liability for company directors.

AUD 285BTotal PAYG withholding collections in FY2022-23, making it the ATO's largest revenue stream (ATO, 2023)
45%Top marginal individual income tax rate in Australia for income above AUD 190,000 (2024-25)
13.7MApproximate number of Australian employees who have PAYG withheld from their wages (ATO, 2023)
AUD 18,200Tax-free threshold for Australian residents, below which no PAYG withholding is required

PAYG Tax Tables and Withholding Rates (2024-25)

Australia uses a progressive tax system with different rates for different income brackets. The 2024-25 rates reflect the Stage 3 tax cuts that took effect on July 1, 2024.

Medicare Levy

On top of income tax, most employees also have a 2% Medicare Levy withheld. This funds Australia's public healthcare system. The levy is built into the PAYG tax tables, so employers don't calculate it separately. Low-income earners below the Medicare Levy threshold (AUD 26,000 for singles in 2024-25) are exempt or pay a reduced rate. The Medicare Levy Surcharge (an additional 1% to 1.5%) applies to higher-income earners who don't hold private hospital insurance.

Taxable Income BracketTax RateTax on This Bracket
AUD 0 - AUD 18,2000%Nil
AUD 18,201 - AUD 45,00016%16 cents for each dollar over AUD 18,200
AUD 45,001 - AUD 135,00030%AUD 4,288 plus 30 cents for each dollar over AUD 45,000
AUD 135,001 - AUD 190,00037%AUD 31,288 plus 37 cents for each dollar over AUD 135,000
AUD 190,001 and above45%AUD 51,638 plus 45 cents for each dollar over AUD 190,000

Tax File Number Declaration and Withholding Variations

Every new employee must complete a Tax File Number (TFN) declaration within 28 days of starting employment. This form tells the employer how to calculate PAYG withholding.

TFN declaration essentials

The TFN declaration captures the employee's Tax File Number, residency status, tax-free threshold claim, HELP/HECS debt status, and any other information that affects withholding. If an employee doesn't provide a TFN within 28 days, the employer must withhold at the top marginal rate (45% plus Medicare Levy) from every dollar earned. No tax-free threshold applies. This rule encourages prompt TFN submission.

Claiming the tax-free threshold

Employees can only claim the AUD 18,200 tax-free threshold from one employer. If they hold multiple jobs, they claim it from their primary employer and their secondary employers withhold at higher rates (no tax-free threshold). Incorrect claims cause under-withholding, leading to a tax debt at year-end. Employers should remind employees with multiple jobs to review their TFN declarations.

Withholding variation applications

Employees who expect significant deductions (investment property losses, self-education expenses, or charitable donations) can apply to the ATO for a PAYG withholding variation. If approved, the ATO issues a variation notice specifying a reduced withholding rate or amount. The employee gives this to their employer, who adjusts the withholding accordingly. This prevents over-withholding and avoids large refunds at tax time.

Employer Registration and Reporting Obligations

Australian employers have specific legal duties around PAYG withholding that carry serious penalties for non-compliance.

  • Register for PAYG withholding with the ATO before making the first payment to an employee. Registration is part of the ABN (Australian Business Number) application or can be done separately.
  • Withhold the correct amount from every payment using ATO tax tables or the ATO's online calculator. The tables are updated at the start of each financial year (July 1).
  • Report withheld amounts through Single Touch Payroll (STP) on or before each pay day. STP replaced the old payment summary and annual reporting system.
  • Remit withheld amounts to the ATO by the due date on your Business Activity Statement (BAS). Monthly remitters lodge by the 21st of the following month. Quarterly remitters lodge by the 28th of the month following the quarter.
  • Issue income statements to employees through STP by July 14 following the end of the financial year, finalizing the year's withholding data.
  • Keep payroll records for 5 years, including TFN declarations, withholding calculations, payment records, and STP submissions.

BAS Reporting and Remittance Schedules

The Business Activity Statement (BAS) is the form employers use to report and pay their PAYG withholding obligations to the ATO.

Reporting frequency

The ATO assigns employers a reporting frequency based on total annual withholding amounts. Small withholders (annual withholding under AUD 25,000) report quarterly. Medium withholders (AUD 25,000 to AUD 1 million) report monthly. Large withholders (over AUD 1 million) report monthly and may have shorter payment deadlines. The ATO can change your frequency based on your withholding patterns.

Key BAS labels for PAYG

Label W1: Total salary, wages, and other payments. Label W2: Total amounts withheld from payments at W1. Label W3: Amounts withheld from investment distributions where no TFN is quoted. Label W4: Amounts withheld from payments where no ABN is quoted. These labels are pre-filled in the BAS. The employer verifies the amounts, makes any corrections, and submits with payment.

Late payment consequences

The ATO charges the General Interest Charge (GIC) on late PAYG remittances. The GIC rate is updated quarterly (approximately 11% per annum in 2024). For deliberate non-remittance, the ATO can issue Director Penalty Notices (DPNs), making directors personally liable for unremitted PAYG, superannuation guarantee, and GST amounts. If the company is more than 3 months overdue on a lodgement, the DPN becomes a "lockdown" DPN, meaning the director's liability can't be discharged by placing the company into administration or liquidation.

PAYG Withholding on Special Payments

Not all payments follow the standard weekly or monthly withholding tables. Several payment types have their own withholding rules.

Bonuses and commissions

Lump-sum bonuses and commissions use Schedule 5 (tax table for back payments and lump-sum payments in arrears) or Method B of the regular tax tables. Method B annualizes the payment to determine the marginal rate, then applies that rate to the bonus. This often results in higher withholding than the employee expects, because the annualization pushes them into a higher bracket. The employee may receive a refund at tax time if the withholding was excessive.

Termination payments

Employment termination payments (ETPs) have special withholding rates. Payments for unused annual and long service leave use specific tax tables (Schedules 7 and 9). Genuine redundancy payments up to the tax-free limit aren't subject to PAYG withholding. The excess is withheld at ETP rates: 17% up to a cap amount (AUD 235,000 in 2024-25) and 47% above the cap, for employees below preservation age. Payroll teams must correctly classify termination components to apply the right rates.

Contractor payments (no ABN quoted)

If a contractor provides services to a business but doesn't quote an ABN on their invoice, the business must withhold 47% from the payment (the top marginal tax rate plus Medicare Levy). This "no ABN withholding" rule is reported under label W4 on the BAS. It doesn't apply if the payment is AUD 75 or less (excluding GST) or if the contractor is exempt from quoting an ABN.

PAYG Installments vs PAYG Withholding

PAYG has two separate components, and it's common for people to confuse them.

FeaturePAYG WithholdingPAYG Installments
Who paysEmployees (withheld by employer)Business owners, investors, self-employed
What it coversIncome tax on wages, salary, other employee paymentsIncome tax on business and investment income
How it's reportedBAS labels W1-W4BAS label T7 (installment income) or T8 (installment amount)
FrequencyEach pay cycle (via STP), remitted monthly or quarterlyQuarterly via BAS
Calculated byEmployer using ATO tax tablesATO (based on prior year income) or taxpayer (varied rate)
Applies toAll employees with a TFNIndividuals and businesses with investment or business income above AUD 4,000

PAYG Withholding in Numbers

PAYG withholding is by far the largest component of Australia's tax revenue, dwarfing company tax, GST, and other sources.

AUD 285B
Total PAYG withholding collected in FY2022-23ATO Annual Report, 2023
13.7M
Individual employees with PAYG amounts withheld from their wagesATO, 2023
45%
Maximum withholding rate (top marginal rate) plus 2% Medicare Levy = 47%ATO Tax Tables, 2024-25
AUD 18,200
Tax-free threshold for residents, the first dollars where zero tax is withheldIncome Tax Assessment Act 1997

Frequently Asked Questions

What happens if an employer doesn't withhold PAYG?

The employer becomes liable for the amount that should have been withheld, even if the employee has since left. The ATO can issue a Director Penalty Notice making directors personally liable. Penalties include the GIC (approximately 11% per annum) on unpaid amounts, administrative penalties of 75% for intentional disregard, and potential criminal prosecution for large-scale or deliberate failures. Directors can be disqualified from managing companies.

Can an employee ask their employer to withhold more tax?

Yes. Employees can request additional withholding by completing a Withholding declaration (NAT 3093) and specifying an additional amount per pay period. This is common for employees with secondary income, investment income, or those who want to avoid a year-end tax bill. The employer adds the extra amount to the standard withholding. It's reported through STP as part of the total withholding.

How does PAYG work for foreign workers on visas?

Foreign workers' PAYG withholding depends on their tax residency status and visa type. Working holiday makers (subclass 417 and 462 visas) are taxed at a flat 15% on the first AUD 45,000, then standard rates above that. Non-residents (no tax-free threshold) are taxed at 30% from the first dollar up to AUD 135,000, then higher rates above. Employers must determine residency status and apply the correct tax table.

Do employers withhold PAYG from superannuation payments?

Not from SG (Superannuation Guarantee) contributions paid into a super fund. Those contributions aren't taxed through PAYG withholding. They're taxed at 15% within the super fund. However, when a person receives superannuation benefits (income stream or lump sum) during retirement, the super fund withholds PAYG under separate rules. Employers aren't involved in that process.

What's the difference between PAYG withholding and the Medicare Levy?

The Medicare Levy (2%) is included in the PAYG withholding amount. Employers don't withhold it separately. The ATO's tax tables already factor in the standard 2% levy, so the amount withheld from each pay covers both income tax and Medicare. The Medicare Levy Surcharge (1-1.5% for high earners without private health insurance) may also be withheld if the employee indicates it on their TFN declaration.
Adithyan RKWritten by Adithyan RK
Surya N
Fact-checked by Surya N
Published on: 25 Mar 2026Last updated:
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