What Is PAYG? PAYG Withholding and PAYG Instalments Explained

Updated 2026-10-04 · Reviewed against official government sources

PAYG stands for "pay as you go". It is Australia's system for collecting income tax during the year, so you do not face one large bill after the year ends. It has two separate parts. PAYG withholding is tax your employer (or another payer) takes out of your pay and sends to the ATO. PAYG instalments are regular prepayments that you make yourself on business and investment income that nobody withholds from. Both are credits against the tax assessed when you lodge your return. This guide explains how each works, who has to use it, the key thresholds and due dates, and what to do if you have both a job and a side business.

PAYG meaning in plain English

Income tax in Australia is assessed once a year, after 30 June, but it is collected through the year under PAYG. When you see "PAYG" or "PAYGW" on a payslip, it means the tax withheld from that pay. When you see "PAYG instalment" on an activity statement or instalment notice, it means a prepayment towards tax on income that has had nothing withheld.

	PAYG withholding	PAYG instalments
Who pays it to the ATO	The payer (employer, Centrelink, super fund)	You, the taxpayer
Income covered	Wages, salaries, director fees, payments without an ABN, some investment income without a TFN	Business income and investment income (rent, interest, dividends)
How the amount is set	ATO tax tables (Schedule 1) and your TFN declaration	Instalment amount or rate from the ATO, based on your last return
How often	Every payday	Usually quarterly
At tax time	Shown on your income statement and credited on your assessment	Credited on your assessment

How PAYG withholding works for employees

Your employer uses the answers on your TFN declaration (tax-free threshold, residency, study loan) to choose a withholding scale. They then apply the ATO's Schedule 1 formula. For weekly pay, the formula is y = a × x − b, where x is your weekly earnings in whole dollars plus 99 cents. On $1,500 a week with the tax-free threshold claimed, the 2026–27 coefficients are a = 0.32 and b = 181.7319. The result rounds to $299 withheld. Fortnightly and monthly pay is converted to a weekly amount and back.

The scales assume you earn the same amount every pay for a whole year, and they include an allowance for the Medicare levy. That is why a second job, a large bonus, investment income or a study loan you did not declare can leave a gap at tax time. You can change your withholding with a Withholding declaration, or ask your payer in writing to withhold more.

PAYG withholding obligations for employers

Businesses that pay employees or directors must withhold from those payments, report them through Single Touch Payroll, and pay the withheld amounts to the ATO. Payments to independent contractors are generally not subject to withholding unless there is a voluntary agreement. If a supplier does not quote an ABN, the payer generally withholds the top rate of tax. A sole trader's or partner's own drawings are not wages, so nothing is withheld from them. The owner covers their tax through PAYG instalments instead.

How often an employer pays withheld amounts to the ATO depends on the total withheld each year:

$25,000 or less (small withholder): report and pay quarterly.
More than $25,000 and up to $1 million (medium withholder): report and pay monthly.
More than $1 million (large withholder): pay electronically within 6 to 8 days of each withholding event.

How PAYG instalments work

PAYG instalments cover tax on business and investment income. The ATO enters an individual or trust into the system automatically when their latest return shows all three of the following:

Instalment income of $4,000 or more. This is gross business and investment income, excluding GST and capital gains.
Tax payable on the latest notice of assessment of $1,000 or more.
Estimated (notional) tax of $500 or more.

PAYG instalment due dates

Most people pay quarterly, using either the instalment amount the ATO calculates or an instalment rate applied to their actual income for the quarter. If you lodge an activity statement online, you may be able to lodge and pay 2 weeks after these dates.

Quarter	Period	Due date
1	July – September	28 October
2	October – December	28 February
3	January – March	28 April
4	April – June	28 July

Annual instalments and voluntary entry

If your most recent notional tax is less than $8,000, you may be able to pay one annual instalment instead, among other conditions. If you prepare your own return, you simply lodge it by 31 October. If you use a tax agent, you pay the annual instalment by 21 October. Some primary producers and special professionals can pay in 2 instalments: 75% by 28 April and the rest by 28 July.

You do not have to wait to be entered. Individuals can join voluntarily through ATO online services (Tax, then Manage, then Tax Registrations, then Add New Registration), through a tax agent, or by phoning 13 28 61. You can vary instalments that are too high or too low.

Example: a job plus a side business

Sam earns $70,000 in a salaried job, and their employer withholds PAYG each payday. Sam also expects $20,000 of profit from a weekend business. Nobody withholds from that income, and it adds about $6,400 of income tax and Medicare levy in 2026–27, because all of it is taxed at Sam's marginal rate. If Sam does nothing, the full amount is due as a lump sum after lodging, and the ATO is likely to start instalments for the next year anyway. If Sam voluntarily enters PAYG instalments, they pay about $1,600 a quarter. When Sam lodges, the instalments are offset against the assessment, leaving little or nothing to pay.

The same applies to rental income, large interest or dividend income, and to study loan repayments. A HELP debt can be included in your instalments so the higher repayment on your combined income does not arrive as a surprise.

Related calculators & guides

Frequently asked questions

Is PAYG the same as income tax?

PAYG is how income tax is collected during the year, not a separate tax. Your actual income tax is worked out when you lodge, and PAYG amounts withheld or paid as instalments are credited against it.

What does PAYG mean on my payslip?

It is the tax your employer withheld from that pay under PAYG withholding. The year-to-date total appears on your income statement in myGov.

Do sole traders pay PAYG?

Sole traders do not have tax withheld from their business income. They pay PAYG instalments once the ATO enters them, or voluntarily. If they employ staff, they must also withhold PAYG from their employees' wages.

What is the difference between PAYG withholding and PAYG instalments?

Withholding is collected by a payer from payments it makes to you, such as wages. Instalments are paid by you on business and investment income, usually each quarter.

Sources

Figures are taken from official government publications and were last reviewed on 2026-10-03.