Summary
PAYG withholding (Pay As You Go withholding) is Australia’s system for collecting income tax from employees — your employer withholds a portion of your wages each pay period and sends it directly to the Australian Taxation Office (ATO) on your behalf — you receive your pay after this deduction has already been made; it appears on your payslip as “PAYG” or “Tax withheld”; it is not an additional tax — it is your income tax, collected in instalments throughout the year rather than as a single lump sum at tax time
The amount withheld depends on how much you earn, whether you have claimed the tax-free threshold, and whether you have a study loan (HECS-HELP) — the tax-free threshold means the first $18,200 of your annual income is tax-free; if you claim it with your employer, less tax is withheld from each pay; if you do not claim it (for example because you have a second job), more is withheld; without a Tax File Number (TFN) on file, your employer must withhold at the highest rate of 47%
The Medicare levy (2% of your taxable income) is included in PAYG withholding — it is not a separate payslip line — at the end of the financial year (30 June), the ATO reconciles the total PAYG withheld against your actual tax liability; if too much was withheld, you receive a refund; if too little, you pay the difference; most employees lodging their first tax return in Australia receive a refund
If you have just received your first Australian payslip and found your gross pay looks significantly different from what you take home, PAYG withholding is the main reason. This guide explains exactly how it works, what determines the amount and what you can do to ensure the right amount is being withheld.
What is PAYG withholding? Understanding what is PAYG Australia
PAYG stands for Pay As You Go. It is Australia’s system for collecting income tax incrementally — from each pay cheque — rather than asking you to settle a lump sum when you lodge your annual tax return.
The system works like this:
- You start a job and give your employer a Tax File Number (TFN) declaration (form NAT 3092)
- Your employer uses your TFN declaration and the ATO’s tax tables to calculate how much tax to withhold from each pay
- That amount is deducted before you receive your pay
- Your employer sends the withheld amount to the ATO
- At the end of the financial year, you lodge a tax return — the ATO reconciles what was withheld against your actual tax liability
PAYG is sometimes called “PAYE” (Pay As You Earn) — the term used in the UK and New Zealand for the same concept. In Australia, the official term is PAYG withholding, and it appears on your payslip as PAYG or Tax withheld.
What does it look like on your payslip?
Australian payslips typically show:
| Line | What it is |
|---|---|
| Gross pay | Your total earnings before any deductions |
| PAYG / Tax withheld | Income tax deducted — the largest deduction for most employees |
| Superannuation (SG) | 12% of your ordinary time earnings — paid by employer on top of gross, not deducted from your pay |
| HECS-HELP repayment | If applicable — withheld alongside PAYG |
| Net pay | What you actually receive |
The Medicare levy (2% of taxable income) is embedded inside the PAYG figure — it is not shown as a separate line on most payslips.
What affects how much PAYG is withheld?
1. Your income
PAYG is based on Australia’s progressive income tax rates — higher earners have proportionally more withheld.
2026-27 Australian income tax rates:
| Taxable income | Rate |
|---|---|
| $0 to $18,200 | 0% (tax-free threshold) |
| $18,201 to $45,000 | 15% |
| $45,001 to $135,000 | 30% |
| $135,001 to $190,000 | 37% |
| Above $190,000 | 45% |
Plus the Medicare levy of 2% on most incomes above the low-income threshold (~$27,222).
2. Whether you claim the tax-free threshold
The tax-free threshold means the first $18,200 of your annual income is tax-free. When you claim it with an employer on your TFN declaration:
- Less tax is withheld from each pay
- Claim it with only one employer — your primary employer
- If you claim it with two employers simultaneously, you may face a tax debt at year-end
New to Australia? Claim the tax-free threshold with your main employer unless you have multiple jobs simultaneously.
3. Your Tax File Number (TFN)
Without a TFN on file, your employer must withhold tax at 47% — the highest marginal rate. Apply for your TFN at ato.gov.au as soon as you arrive and have an Australian address.
4. Working holiday makers (visa subclass 417 or 462)
Working holiday makers are taxed under a different scale (Scale 6):
- 15% on the first $45,000
- Standard resident rates above $45,000
Working holiday makers cannot claim the tax-free threshold.
5. Study loans (HECS-HELP, VSL, SSL)
If you have an Australian study loan and your income exceeds the repayment threshold, an additional repayment amount is withheld alongside your PAYG tax. Declare this on your TFN declaration when starting a new job.
6. Second jobs
If you have a second job, you cannot claim the tax-free threshold for it. Your second employer withholds tax at a higher rate to account for the fact your income is already at a higher bracket from your primary job.
Single Touch Payroll (STP) — how the ATO knows
Since 1 January 2022, all employers are required to use Single Touch Payroll Phase 2 (STP Phase 2) — software that sends each employee’s pay and tax details directly to the ATO every payday, in real time.
This means:
- The ATO has near real-time visibility of your income and PAYG withholding
- You can view your income statement (formerly the payment summary) in myGov at any time during the year
- Your employer no longer needs to issue a separate “group certificate” at year-end — your income statement is finalised in STP
Check your PAYG withholding: Log into myGov, navigate to ATO linked services, and check your income statement. If the amount looks incorrect, speak to your employer’s payroll team.
The tax year and what happens at the end
Australia’s financial year runs from 1 July to 30 June.
After 30 June, you lodge a tax return (through myGov or a registered tax agent). The ATO:
- Takes the total PAYG withheld throughout the year
- Compares it to your actual tax liability based on your final taxable income
- Issues a refund if too much was withheld, or raises an assessment if too little was withheld
Tax return deadline: 31 October for individuals lodging their own return; registered tax agents may have extended deadlines.
Most first-year migrants receive a refund — because they arrived partway through the financial year and had a full year’s worth of tax withheld against a partial year’s income.
PAYG instalments — for those with other income
PAYG withholding applies to employees. If you also have income from investments, rental properties or a business, the ATO may ask you to pay PAYG instalments on that income throughout the year — so the tax is also collected progressively rather than as a lump sum at tax time.
PAYG instalments are separate from PAYG withholding on your wages.
FAQs (frequently asked questions)
What is PAYG on my payslip?
Pay As You Go withholding — your income tax, deducted by your employer each pay period and sent to the ATO on your behalf. It is not an extra tax — it is your income tax, collected progressively throughout the year.
Why is so much tax withheld from my pay?
The amount depends on your income, whether you claimed the tax-free threshold and whether you have a study loan. Without a TFN on file, your employer withholds at 47%. Claiming the tax-free threshold with your primary employer reduces the amount withheld.
Can I claim the tax-free threshold with two employers?
No — claim it with only one employer (your primary job). Claiming it with two employers at the same time can result in a tax debt at year-end because not enough tax is withheld overall.
What happens if too much PAYG is withheld?
The ATO refunds the overpayment when you lodge your tax return after 30 June.
When do I lodge my Australian tax return?
The deadline is 31 October each year for individuals lodging their own return (covering the financial year ending 30 June). Lodge through myGov at my.gov.au.
I just arrived in Australia — should I claim the tax-free threshold?
Yes — if this is your only Australian job, claim the tax-free threshold on your TFN declaration when you start. This reduces the amount withheld from each pay.
Related guides
- Understanding your Australian payslip →
- What is a TFN (Tax File Number)? →
- What is superannuation? →
- What is the Medicare levy? →
- How to build a credit score in Australia →
This guide is for general information only and does not constitute tax advice. Tax rates and thresholds change annually — always verify at ato.gov.au. Last updated September 2026.
Sources: ATO — PAYG withholding (ato.gov.au official) | payslipmate.com — PAYG Withholding Explained for Australian Employers 2026 (May 21, 2026) | austax.tools — PAYG Withholding Calculator Australia 2026-27 (July 28, 2026) | invoicedataextraction.com — Australian Payslip Explained (June 9, 2026) | settleau.com.au — Understanding Australian Pay Slips (April 10, 2026) | scalesuite.com.au — What is PAYG Withholding? Complete Guide for Australian Employers 2026 (March 30, 2026)
