PAYG withholding in 2026: What Australian employers need to know

If you're about to make your first payment to an employee in Australia, PAYG withholding is the one thing you need to set up before that payment goes out, not after. Here's exactly what it is, how it works, and what's changed for the 2026–27 financial year.

What is PAYG withholding

PAYG withholding is when you take out tax from payments you make to your employees, directors, or certain contractors, then send it to the Australian Taxation Office (ATO) on their behalf. It's how Australia collects income tax gradually, pay cycle by pay cycle, so your team isn't hit with one large bill after their return.

Here's what that looks like in practice. Say your employee Leah earns AUD $1,333.45 a week and has claimed the tax-free threshold on her TFN declaration, with nothing else on file. Applying the ATO's published 2026–27 formula for her income band, you'd withhold AUD $245 and pay her AUD $1,088.45. That AUD $245 goes straight to the ATO as you're not deciding the amount, you're running the ATO's formula.

Founder's note: if you're setting up payroll in Australia for the first time while running operations elsewhere, PAYG withholding is one of the few things you can't run "your home country's way." It needs an Australia-specific setup from day one, starting with registration before your first payment.

What's changed for the 2026–27 financial year

Two things landed on 1 July 2026 that directly affect how you run PAYG withholding this year.

1. The lowest marginal tax rate, applied to income between AUD $18,201 and AUD $45,000, dropped from 16% to 15%. Because of that, the ATO reissued all 15 withholding schedules and 12 tax tables, effective from 1 July 2026. If your payroll software or manual tax-table reference hasn't updated, you're over-withholding from anyone in that bracket.
   
2. Separate from PAYG withholding but landing on the same date: Payday Super now requires you to pay superannuation guarantee contributions on payday itself, with the contributions landing in the employees’ funds within 7 business days of each payday, replacing the old quarterly schedule. An extended timeframe can apply, in case of, say, new employees. Superannuation Guarantee is paid on top of wages, not withheld from the employee's pay, so it isn't part of PAYG withholding even though it now shares a payment rhythm with it. This is a common employer misconception worth pre-empting.
   

If you're tracking these changes against your own reporting calendar, our guide to the Australian financial year lays out the key dates in one place.

How PAYG withholding works

The mechanics of PAYG withholding are straightforward once you've registered:

• You calculate. Each pay cycle, you work out the PAYG withholding amount using the ATO's tax tables or its online calculator.
  
• You withhold. You deduct that amount from the employee's gross pay before it reaches their account.
  
• You remit. You send the PAYG withholding amount to the ATO on a schedule set by how much you withhold annually, not by when you feel like paying it.
  
• You report. Most employers now report through Single Touch Payroll (STP), which sends the data to the ATO when you run payroll.
  

Did you know? Since STP Phase 2, your withholding data reaches the ATO on every single pay run, not just at Business Activity Statement (BAS) time. It's easy to still think of PAYG withholding as a quarterly or monthly catch-up task, but the ATO already has visibility the moment you pay your team.

PAYG withholding is a narrower concept than withholding tax more broadly, which also covers things like investment income and payments to foreign residents. This guide focuses specifically on the employer side.

Who needs to withhold PAYG

Your PAYG withholding obligation depends on who you're paying and how they're engaged. Run through this before your first payment:

• Employees: you withhold from wages, salary, bonuses, and leave payments.
  
• Company directors: directors' fees are treated the same way as employee wages.
  
• Labour-hire workers and office holders: labour-hire arrangements, religious practitioners, and government office holders, including members of parliament, statutory office holders, police, and defence force members, sit under the same PAYG withholding tables as employees.
  
• Paid parental leave and foreign resident payments: if you administer government paid parental leave payments, or pay a foreign resident worker, PAYG withholding still applies, just on a different rate schedule.
  
• Contractors without an ABN: if a business or contractor doesn't quote their Australian Business Number (ABN) to you, you generally withhold from what you pay them.
  
• Contractors with a voluntary agreement: some contractors choose to enter a voluntary withholding agreement with you. Check with them directly rather than assuming.
  
• Sole traders and partnerships, paying yourself: money you draw out of your own business is a personal drawing, not a wage. You don't withhold from it. Instead, you manage your own income tax through PAYG instalments, covered below.
  

Whether someone counts as an employee or an independent contractor isn't just about what the contract says. It depends on the whole working relationship. If you're unsure, the ATO's employee-or-contractor guidance is the place to check before you set up payroll.

How to register for PAYG withholding

You must register for PAYG withholding before you make your first payment that requires it, not after your first pay run.

• Confirm you have an active ABN. This is a prerequisite for registering online.
  
• Register through the ATO's Online services for business, or ask a registered tax or BAS agent to register on your behalf.
  
• Do this before payday, not once you've already paid someone. Late PAYG withholding registration doesn't excuse you from the withholding obligation for that payment.
  

Registering for PAYG withholding is a separate step from other business registrations. It doesn't happen automatically when you set up your ABN or register for GST. If you're working through a first-time Australian business setup, treat this as its own checklist item.

How to calculate PAYG withholding

Once you're registered, you calculate PAYG withholding using one of two ATO-published tools: the online tax withheld calculator, or the printed PAYG withholding tables, which vary by pay cycle: weekly, fortnightly, or monthly. Both run the same underlying formula, which accounts for the tax-free threshold, the Medicare levy, and study and training support loan (HECS-HELP) repayments where relevant.

The formula itself is straightforward once you see it: drop any cents from the gross pay, add 99 cents to get a value the ATO calls x, then apply withholding = (a × x) − b, where a and b are published coefficients that step up at different income bands, similar to marginal tax brackets. Round the result to the nearest dollar.

These coefficients are what set your actual PAYG withholding rates for each income band, which is why the amount withheld doesn't move in a straight line as pay increases.

Here's how the formula plays out across three earners, all claiming the tax-free threshold:

[Table:1]

Priya's effective rate works out to about 26%, roughly 8.6 percentage points higher than Marcus's, even though her pay is just over double his. That jump shows why a single, static withholding rate would badly under-collect from higher earners: the coefficients step up faster than income does once you cross into a new band.

Most payroll software runs this exact formula automatically once it's set up correctly, which is one reason getting your payroll software configuration right at the start matters more than getting good at reading coefficients by hand.

Reporting and paying PAYG withholding to the ATO

How often you pay and report your PAYG withholding depends on how much you withhold across the year, not on how often you run payroll:

[Table:2]

Until you send it to the ATO, the amount you've withheld sits in your accounts as a PAYG payable liability, not as cash you can spend. On your BAS, it's reported at W1 for the total payments you've made and W2 for the actual PAYG tax withheld.

If you report through STP and finalise it at year end, you don't need to send separate payment summaries or lodge an annual report. For anything not reported through STP by self-lodging or without a registered agent, you'd give employees a payment summary by 14 July and lodge the annual report with the ATO by 14 August. Employers using a registered tax/BAS agent to lodge the annual report get until 30 September.

One thing growing founders miss: the ATO reviews your withholding cycle every April. If your annual withholding total has grown into a higher band, say, you've gone from two employees to twelve, your reporting cycle can shift from 1 July, and the ATO writes to tell you. If your reporting is done through your BAS, keep an eye on this each year rather than assuming last year's cycle still applies.

PAYG withholding vs PAYG instalments

The difference between PAYG withholding and PAYG instalments is worth separating clearly, since it's the single most common point of confusion in PAYG:

[Table:3]

Both share the same "PAYG" name because both spread tax payments across the year instead of one lump sum, but they run in opposite directions: withholding is tax you collect from someone else, instalments are tax you prepay on your own income. If you're a sole trader or partnership drawing money from your own business, that draw doesn't get PAYG withholding applied at all. It's managed through instalments instead.

You end up in the instalments system one of two ways: automatically, once your business or investment income crosses a threshold and the ATO enrols you, or voluntarily, if you'd rather get ahead of a tax bill before you're required to. Whether you report instalments on your BAS or a separate instalment activity statement depends on whether you're registered for GST.

Common PAYG withholding mistakes to avoid

A handful of errors show up repeatedly:

• Registering late, or not at all. The obligation to withhold starts with your first eligible payment, whether you've registered yet or not.
  
• Employees claiming the tax-free threshold from more than one employer. This under-withholds and creates a surprise tax bill at year end. Employers withhold based on what the employee's declaration states and aren't responsible for cross-checking other employment, so this can only be caught if the employee discloses it.
  
• Missing a HECS-HELP declaration. If an employee doesn't disclose a study loan, the extra withholding component isn't applied, creating a shortfall. How you correct it depends on timing and reporting method:
  

• Same financial year: Adjust withholding for future pay runs to catch up the shortfall.
  
• Later financial year, STP-reported: Lodge an update event; do not adjust the tax withheld amount.
  
• Later financial year, not STP-reported: Issue an amended payment summary and annual report.
  

• Getting the correction process wrong. If you've over-withheld and caught it early, refund the employee directly, even if you've already sent the amount to the ATO. If you catch it after 30 June following the relevant financial year, don't refund the employee. Issue an amended payment summary and lodge an amended PAYG payment summary statement with the ATO instead.
  
• Running PAYG withholding on last year's tax tables. After 1 July 2026, the updated tables apply, and using the previous year's figures means over-withholding your team.
  

Keeping PAYG withholding simple as you grow

PAYG withholding stops feeling complicated once you've registered, run your first calculation, and settled into your reporting cycle. From there, it's one more Australia-specific process built into how you run payroll, alongside Payday Super and the rest of your compliance calendar, not a recurring source of surprises.

If you're setting this up as part of a broader move into Australia, PAYG withholding is rarely the only new obligation you're juggling at once. Aspire¹ won't run your tax tables for you, but it does give you an expense management system to see wages, tax, and super moving out of your account for a growing Australian team alongside operations globally. This gives you clear visibility over what’s leaving your account each pay cycle and makes it easier to catch a mismatch before it becomes a compliance problem.

FAQs

What happens if you don't withhold PAYG correctly?

You risk penalties from the ATO, and in some cases you can become ineligible for deductions you'd otherwise claim. If you catch an over-withholding error early, refund the employee directly. If you catch it late, correct it through the ATO rather than the employee.

Can you get PAYG withholding back?

If you're an employee, yes, in the sense that it's not lost money — it's credited against your income tax when you lodge your return, and any excess comes back as a refund. As the employer, you don't get anything "back". You're passing the employee's own tax through to the ATO. Note this is separate from the ATO's over-withheld refund process for foreign residents' investment income, which is a different regime entirely.

What are the penalties for getting PAYG withholding wrong?

Two specific mechanisms apply, per the ATO's compliance guidance: you can lose the ability to claim a tax deduction for payments where you didn't meet your withholding obligations, and a separate "non-compliance tax" can be charged. Persistent non-compliance draws closer ATO attention, particularly since STP now gives the ATO real-time visibility of your payroll.

How do you handle a PAYG withholding variation?

The employee applies to the ATO directly, not to you. There are two types: an upward variation, where they ask to have more withheld because they expect a tax bill, and a downward variation, which the ATO approves when the standard rate would over-withhold, typically because of higher-than-usual deductible expenses. Either way, you can't change what you withhold until you receive an official variation notice from the ATO. The employee's request to you isn't enough on its own.

Does PAYG withholding apply to contractors?

PAYG withholding only applies to contractors in specific situations: if they don't quote their ABN to you, or if they've entered a voluntary withholding agreement with you. Contractors who quote a valid ABN and haven't signed a voluntary agreement generally manage their own tax through PAYG instalments.

Do casual and part-time employees need PAYG withholding?

Yes. Withholding applies based on employment status and earnings, not on whether someone works full-time, part-time, or casual hours.

What happens if an employee doesn't give you a TFN?

If an employee doesn't provide a Tax File Number (TFN), you generally withhold 47% for resident payees and 45% for foreign residents rather than using the standard tax-free-threshold tables, since the ATO can't confirm their circumstances without it.

How often do I need to check the tax table?

At least once a year. The ATO reissues its PAYG withholding tables and schedules for the start of each financial year, and older payroll setups don't always pick up the change automatically. Beyond that annual check, watch for two triggers: a mid-year rate change like the 2026–27 cut, and any updated TFN or withholding declaration an employee gives you, since those can shift which column or scale applies to them. If your payroll software is current, it applies the new tables from the first pay period after 1 July on its own. If you're calculating manually, that's your cue to download the new tables yourself.

Is PAYG withholding compulsory?

Yes, if you're paying employees, directors, or contractors who fall into the categories above. PAYG withholding isn't optional once the payment type applies to you.