How to Calculate PAYG Withholding in Australia (2026 Guide)

Quick Answer

To calculate PAYG withholding: take the employee's gross pay, annualise it, apply the ATO's 2025–26 tax withheld tables (Schedule 1), then divide the annual figure back to match your pay frequency. You report and pay it to the ATO monthly or quarterly via your Business Activity Statement. From 1 July 2026, Payday Super changes when super must be paid — but PAYG withholding itself follows the same calculation process.

What Is PAYG Withholding and Who Has to Do It?

PAYG stands for Pay As You Go. Withholding is the portion of an employee's gross pay that you, the employer, hold back and send directly to the ATO. The employee gets their net pay; the ATO gets the withheld tax. At the end of the financial year, the employee lodges their tax return and the withheld amounts are credited against whatever they actually owe.

You are legally required to register for PAYG withholding before you make your first payment to an employee or contractor who hasn't quoted an ABN. Registration is free and done through your ABN registration or the ATO Business Portal. Once registered, you become a withholder and must report every payment event through Single Touch Payroll (STP). Under STP Phase 2 — which has been mandatory since 1 January 2022 for most employers — each pay run is reported to the ATO in real time.

Note that PAYG withholding also applies to payments to contractors who haven't provided an ABN. In that case, you withhold at the top rate of 47% and pay it to the ATO. This is a separate obligation from superannuation but often overlooked by small business owners who assume the contractor arrangement removes all withholding duties.

The ATO Tax Tables: Which One Do You Use?

The ATO publishes withholding tables called Schedule 1 — Statement of formulas for calculating amounts to be withheld. It's a dense document, but you only need to know your employee's pay frequency, their tax scale, and whether they have a HECS/HELP debt. The ATO also provides a simplified version through their online Tax Withheld Calculator at ato.gov.au.

Tax scales run from Scale 1 (standard, tax-free threshold claimed) to Scale 6 (working holiday makers). The correct scale for most Australian resident employees who claim the tax-free threshold is Scale 1. If they haven't claimed the tax-free threshold, use Scale 2 — withholding will be higher. If they have a HECS debt, use the relevant HECS column which adds a compulsory repayment component on top of regular withholding.

For 2025–26, the tax-free threshold is $18,200. The resident individual tax rates above that are: 16% on $18,201–$45,000; 30% on $45,001–$135,000; 37% on $135,001–$190,000; and 45% above $190,000. These are the underlying rates driving the Schedule 1 tables. The low income tax offset (LITO) and low and middle income adjustments are built into the table calculations — you don't add them separately.

Step-by-Step: How to Calculate PAYG Withholding

Step 1: Identify the employee's gross earnings for the pay period. This includes base pay, overtime, commissions, and any allowances that are not exempt. Do not include genuine expense reimbursements — those are not earnings.

Step 2: Annualise the gross pay. Multiply weekly earnings by 52, fortnightly by 26, or monthly by 12. This gives you the annual equivalent that maps to the ATO tax tables. Example: an employee earning $2,500 per fortnight has an annualised figure of $65,000.

Step 3: Look up the withholding amount for that annual figure in the ATO Schedule 1 tables for your employee's tax scale. At $65,000 annualised under Scale 1 (2025–26), the annual withholding is approximately $12,117 based on the ATO formula: ($65,000 × 0.30) − $5,533 = $13,967, less the LITO adjustment of approximately $1,850, giving roughly $12,117. Step 4: Divide the annual withholding back to your pay period. For fortnightly: $12,117 ÷ 26 = $466 withheld per fortnight. Round to the nearest dollar.

Handling Allowances, Bonuses, and Irregular Payments

Not all payments are treated the same way. A tool allowance that simply reimburses an employee for a documented expense is not subject to withholding. But a flat allowance paid regardless of actual cost — like a daily travel allowance above the ATO reasonable amounts — is treated as ordinary earnings and must be included in the gross for withholding purposes. Check ATO Tax Determination TD 2025/5 for current reasonable amounts.

Bonuses and back payments need special treatment. For a bonus, the ATO method is: add the bonus to the employee's most recent normal pay period earnings, annualise that combined figure, calculate the tax on it, then subtract the tax you would have withheld on the normal pay alone. The difference is the withholding on the bonus. This avoids over-withholding caused by treating the bonus as if it were earned every period.

Lump sum payments like redundancy, unused annual leave on termination, and genuine redundancy payments each have their own withholding rules. Redundancy payments up to the tax-free limit (currently $12,524 base + $6,264 per completed year of service for 2025–26) are exempt from withholding entirely. The excess is taxed at a maximum 32% concessional rate. Getting this wrong on a termination payout creates both a tax liability and a potential Fair Work underpayment issue.

Reporting, Payment Deadlines, and STP

Once you've calculated and withheld the right amount, you have two obligations: report it via STP and pay it to the ATO by the due date. STP reporting happens automatically at each pay run if you're using compliant payroll software. You don't file a separate PAYG withholding report — the STP data is the report. At EOFY, your STP finalisation replaces the old payment summary (group certificate).

Payment deadlines depend on your withholder category. Small withholders (annual withholding under $25,000) pay quarterly, aligned to their BAS due dates: 28 October, 28 February, 28 April, and 28 July. Medium withholders ($25,000–$1 million per year) pay monthly — due on the 21st of the following month. Large withholders (over $1 million) pay within six to eight days of each payday. Check your ATO correspondence to confirm your category — it can change as your payroll grows.

If you underpay PAYG withholding, the ATO charges a Shortfall Interest Charge (SIC) plus a penalty of up to 75% of the shortfall for recklessness. There is no grace period. The safest approach is to reconcile your withheld amounts against your STP year-to-date figures at least monthly — most payroll software does this automatically.

Common Mistakes and How to Avoid Them

The most expensive mistake is applying the wrong tax scale. If an employee hasn't claimed the tax-free threshold but you use Scale 1 anyway, you'll under-withhold. The ATO will still collect the shortfall from the employee at tax time — but if the employee has since left Australia or is uncontactable, the ATO can come back to you as the withholder. Always collect a TFN declaration on day one and match the scale to what the employee has ticked.

The second most common issue is forgetting HECS/HELP repayments. Around 3 million Australians have an active student loan. If your employee has one and you don't withhold the additional repayment component, they'll face a large tax bill at EOFY. The employee should disclose this on their TFN declaration. If they don't and you find out later, you can adjust prospectively — but you can't reclaim the previous under-withheld amounts from the ATO on their behalf.

Finally, many small employers miscalculate withholding for part-time and casual employees by annualising a single week's pay without considering that the employee may work irregular hours. If a casual employee works 38 hours one week and 10 hours the next, annualising the 38-hour week overstates their likely annual income. The ATO recommends using the actual pay period earnings for each run — not an average — and looking up the withholding for that specific period's gross. This is exactly what STP-compliant payroll software handles automatically.

SAB Account AI calculates PAYG withholding automatically at every pay run, reports it via STP, and alerts you before BAS due dates — so you're never guessing the right number.

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What is the PAYG withholding rate in Australia for 2025–26?

There is no single flat rate — withholding depends on the employee's annualised income and tax scale. Under Scale 1, an employee earning $65,000 per year has approximately $12,117 withheld, which works out to roughly 18.6% effective withholding. The marginal rates range from 0% (under $18,200 tax-free threshold) up to 45% for income above $190,000.

What happens if I don't withhold enough PAYG tax?

The ATO can recover the shortfall from you as the employer, plus charge the Shortfall Interest Charge and penalties of up to 75% of the underpaid amount. The employee's tax liability remains, but the ATO's primary collection target is the withholder. Fix any calculation errors as soon as you find them by lodging an amendment through your BAS.

Do I calculate PAYG withholding on superannuation contributions?

No. Employer super contributions (the 12% Super Guarantee from 1 July 2025) are not included in the employee's gross wages for PAYG withholding purposes. You withhold only on the cash wage or salary. Super contributions are separately reported through STP and paid to the fund.

How does PAYG withholding change from 1 July 2026?

The PAYG withholding calculation itself does not change on 1 July 2026. What changes is Payday Super — superannuation must now be paid within 7 days of each payday instead of quarterly. Your payroll cash flow must now support both the withheld tax (held until your next BAS) and the super payment going out within the same week.

Can I use the ATO's tax withheld calculator instead of the tables?

Yes, the ATO Tax Withheld Calculator at ato.gov.au is the simplest way to get the correct withholding amount for each employee. It uses the same Schedule 1 formulas and is updated each financial year. STP-compliant payroll software like SAB Account AI runs the same calculation automatically at every pay run.

Related: Payg Withholding Calculator Australia · Single Touch Payroll Small Business Australia · Payslip Requirements Australia · Casual Employee Payroll Australia · Payday Super 2026