PAYG trips people up because it is two different systems wearing the same name. PAYG withholding is the tax you take out of other people’s pay and send to the ATO. PAYG instalments are pre-payments of tax on your own income. They share a goal, paying tax steadily across the year instead of in one hit, but they apply to different money.
Figure 1: same name, two jobs. Withholding is tax on the people you pay; instalments are tax on your own income.
PAYG withholding: tax on the people you pay
If you employ anyone, you must withhold tax from their wages and send it to the ATO. The same applies to directors’ fees and to contractors who do not quote an ABN. You register for PAYG withholding before your first pay run, work out the amount from the ATO’s tax tables, and report it through Single Touch Payroll every time you run a pay.
Two traps catch new employers. If a worker does not give you a tax file number, you withhold at 47%. If a supplier does not quote an ABN, you withhold 47% on payments over $75. And unpaid withholding is serious: company directors can be made personally liable for it through a director penalty notice.
PAYG instalments: tax on your own income
If you earn business or investment income with no employer taking tax out for you, the ATO asks you to pre-pay your own income tax in instalments. It enters you into the system automatically once your notional tax passes a small threshold, based on your last return. You can pay the fixed amount the ATO works out, or apply an instalment rate to your actual income each quarter, which suits businesses whose income moves around.
Both halves of PAYG are reported and paid on your BAS, or on an instalment activity statement, so the tax is spread across the year rather than landing as a shock in October.
Which ones apply to you?
You can be in one, both, or neither. A sole trader with no staff usually has instalments but no withholding. A company that employs people and turns a profit often has both. If you also package benefits on top of wages, the FBT rules come into it too, and either way you will want clean records behind every figure.
The detail, for the record
Current as at the 2025-26 income year.
PAYG withholding
- Who. Withhold from employees, directors, contractors who do not quote an ABN, voluntary-agreement workers, and some payments to non-residents. Register before the first payment.
- No TFN or no ABN. No TFN supplied means withholding at 47% (top rate plus Medicare levy). No ABN on a supplier invoice means withholding 47% on payments over $75 (rule in place since 1 July 2017), reported at label W4.
- Reporting. Report through Single Touch Payroll each pay cycle. STP Phase 2 has been mandatory since 1 January 2022. STP finalisation is generally due by 14 July (30 September for closely held payees).
- Cycle. Small withholders (under $25,000 a year) pay quarterly; medium ($25,000 to $1 million) monthly; large (over $1 million) within 6 to 8 days of each pay event.
- Director liability. Unpaid PAYG withholding can be recovered from company directors personally through a director penalty notice.
PAYG instalments
- Entry. The ATO enters you automatically based on your most recent return, generally once notional tax exceeds $500. Reported at label T7 (amount method) or T2 and T8 (rate method).
- Methods. Pay the ATO-calculated instalment amount (uplifted by a GDP adjustment factor of 4% for 2025-26), or apply an instalment rate to your actual income. Entities with aggregated turnover of $50 million or more must use the rate method. You can vary an instalment if circumstances change.
Paying late
- General interest charge applies to amounts paid late (around 10.65% in early 2026). From 1 July 2025, GIC is no longer tax-deductible, so late payment costs more in real terms.
Marginal rates 2025-26 (resident, before 2% Medicare levy)
- $0 to $18,200 nil; $18,201 to $45,000 at 16%; $45,001 to $135,000 at 30%; $135,001 to $190,000 at 37%; $190,001 and over at 45%. Withholding tax tables already build in the Medicare levy.
Withholding and instalments both flow onto the same BAS, which is where the mix-ups show up. Homepedia Tax Assistant keeps PAYG-W and PAYG-I separate and prepares the statement so each lands in the right label.
This article is general information, not personal tax advice. Talk to a registered tax or BAS agent about your situation.
Frequently asked questions
What is the difference between PAYG withholding and PAYG instalments?
Withholding is tax you take out of payments to other people, mostly employees, and send to the ATO. Instalments are prepayments toward your own income tax.
Do I have to register for PAYG withholding?
Yes, before your first withholding payment. It attaches to your ABN and there is no separate registration number.
How often do I pay PAYG withholding?
The ATO sets your cycle by how much you withhold in a year. Small withholders report and pay quarterly, medium withholders monthly, and large withholders on a much shorter electronic cycle.
Do I still report W1 on my BAS if I use STP?
No. Where you report through Single Touch Payroll the ATO already has the data, and the withholding labels are prefilled rather than separately reported.
