Tax & ATO
What is PAYG?
Pay As You Go
Pay As You Go (PAYG) is the ATO system for paying income tax progressively through the year rather than in one hit. PAYG withholding requires employers to take tax out of wages every pay run; PAYG instalments require businesses and investors to prepay tax on their own income, usually quarterly. Both report on activity statements.
PAYG withholding: tax taken from wages
PAYG withholding is the employer-side system. Before your first pay run you register for PAYG withholding (it attaches to your ABN), and from then on you calculate tax on each payment to employees using the ATO's tax tables, currently Schedule 1 (NAT 1004) for the 2026-27 year, informed by each employee's TFN declaration: residency, tax-free threshold claim, and any study loan. The amounts withheld are reported to the ATO in real time through Single Touch Payroll and again in summary on your BAS at labels W1 (gross wages) and W2 (tax withheld), then paid over with the BAS.
Withholding is not limited to wages. It also applies to directors' fees, some termination payments, payments to workers under voluntary agreements, and, at 47%, to any supplier who fails to quote an ABN and any employee who fails to provide a TFN within 28 days. The withheld money is never the employer's: it is the employee's tax, held on trust until it reaches the ATO, and the ATO treats unpaid withholding far more severely than most debts, including making directors personally liable through director penalty notices. The current tables live under tax tables on ato.gov.au.
PAYG instalments: prepaying tax on business income
PAYG instalments are the other half of the system and apply to income no one withholds from: sole trader profits, partnership and trust distributions, rent and investment income. Rather than facing an entire year's tax as one bill after lodgement, the ATO enters you into the instalments system automatically once your instalment income and expected tax cross its thresholds, and you prepay quarterly on your activity statement. The instalments then come off your final tax bill when your return is assessed.
You can pay either the ATO-calculated instalment amount (simple, based on your last return uplifted by a GDP factor) or apply an instalment rate to your actual income for the quarter (more accurate when income swings). If your year is tracking well below the ATO's assumption, you can vary the instalment down, but a variation that lands more than 15% under your actual liability can attract general interest charge, so vary on evidence rather than optimism. For new sole traders the instalments system is the classic second-year shock: the first year's tax bill arrives together with the first quarterly instalments for the following year. Setting aside tax from each invoice from day one, and checking the numbers with the OneBookPlus PAYG calculator, removes the surprise.
FY2026-27 resident tax rates
Both withholding and instalments ultimately aim at the same target: your income tax under the resident rate scale.
| Taxable income | Tax on this income (2026-27) |
|---|---|
| $0 to $18,200 | Nil |
| $18,201 to $45,000 | 15c for each $1 over $18,200 |
| $45,001 to $135,000 | $4,020 plus 30c for each $1 over $45,000 |
| $135,001 to $190,000 | $31,020 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,370 plus 45c for each $1 over $190,000 |
The 2% Medicare levy applies on top for most taxpayers. The second bracket fell from 16% to 15% on 1 July 2026, which is what moved the cumulative amounts to $4,020, $31,020 and $51,370; the thresholds themselves did not change. Under the same 2025 legislation it falls again to 14% from 1 July 2027, so the withholding tables will change once more at that date. Study and training support loan (STSL) repayments are withheld on top of these rates once income passes the repayment threshold ($69,528 for 2026-27, applied marginally to income above the threshold).
Run your own PAYG numbers
The definitions above only get you so far; the free OneBookPlus PAYG withholding calculator turns them into your own figures in seconds, no sign-up needed.
PAYG frequently asked questions
What is the difference between PAYG withholding and PAYG instalments?
Withholding is tax an employer takes out of someone else's pay and remits to the ATO. Instalments are prepayments of your own income tax on business or investment income. A sole trader with staff can be in both systems at once: withholding from employees' wages and paying instalments on their own profit.
Can I reduce my PAYG instalments if business slows down?
Yes. You can vary the instalment amount or rate on your activity statement before it is due. Be realistic: if your varied instalments end up more than 15% below your actual tax liability for the year, the ATO can charge general interest on the shortfall.
Why did the ATO put me into PAYG instalments?
Your last tax return showed enough business or investment income, and enough tax payable on it, to cross the ATO's entry thresholds. It is automatic, not a penalty. The quarterly prepayments are credited against your next assessment, so you are paying the same tax earlier, not extra tax.
Last reviewed and updated: by Bishal Shrestha