PAYG (Pay As You Go) is the ATO's umbrella system for collecting income tax progressively throughout the year rather than in one annual payment. In 2026, PAYG operates through two distinct mechanisms: withholding (for employers and payments to others) and instalments (for business and investment income earners). Knowing which applies to you — and how to manage both — is essential for avoiding tax debt and penalties.

PAYG Withholding vs PAYG Instalments: What's the Difference?

  • PAYG Withholding: Tax deducted by an employer from employee wages; also applies to contractor payments (if the contractor doesn't quote an ABN), interest, dividends, and royalties paid to non-residents. The payer deducts and remits to the ATO on your behalf.
  • PAYG Instalments: Advance payments of your own income tax on business or investment income. You pay these yourself each quarter. They apply when your non-withheld tax liability exceeds $1,000.

PAYG Withholding: Employer Obligations in 2026

If you employ staff or pay contractors without ABNs, you must withhold tax from payments and remit it to the ATO. Key 2026 obligations:

  • Register for PAYG withholding through the ATO (ABN registration process)
  • Withhold tax at the correct rate from wages using ATO tax tables
  • Report withheld amounts through Single Touch Payroll (STP) each pay run
  • Remit withheld amounts to the ATO monthly, quarterly, or annually depending on your withholder category
  • No TFN quoted? Withhold at 47% (top rate)

Withholding Variation for Lower Tax Rates

If too much tax is being withheld from your payments — for example, because you have significant deductions like rental property losses or investment interest — you can apply to the ATO for a PAYG withholding variation. This reduces the amount withheld from your pay, improving your weekly cash flow instead of waiting for a tax refund after lodgement.

How PAYG Credits Work at Tax Time

Both PAYG withholding and PAYG instalment amounts paid during the year are credited against your final tax liability when you lodge your annual return. If total credits exceed your liability, you receive a refund. If your credits fall short, you owe the difference (plus any GIC if instalments were significantly underpaid).

Frequently Asked Questions

Do contractors pay PAYG withholding?

Contractors who quote a valid ABN are generally exempt from PAYG withholding — they are responsible for their own tax through the instalment system. If a contractor does not provide an ABN (or the ABN is invalid), the paying business must withhold 47% from the payment and remit it to the ATO.

When must withheld amounts be paid to the ATO?

Large withholders (annual withheld amounts of $1 million or more) must pay within 5 business days of the payment date. Medium withholders pay monthly by the 21st of the following month. Small withholders report and pay quarterly through their BAS. Check your withholding category on the ATO's business portal.

Can I get a refund on PAYG withholding if I paid too much?

Yes. If more PAYG tax was withheld from your wages than your actual tax liability, you receive a refund when you lodge your tax return. The ATO processes most individual refunds within 12 business days of lodgement. You can check your refund status through myGov.

Questions about PAYG obligations for your business or personal tax? Contact AWTS — we help businesses manage withholding compliance and individuals optimise their PAYG position.