Key takeaways
- The chain is: annualise the pay, tax the annual figure, divide back. Brackets never apply to a single payslip directly.
- On $85,000 in 2026-27 the total is $17,720: $16,020 income tax after offsets plus $1,700 Medicare levy, an effective rate of 20.8%.
- Per pay, that is about $682 a fortnight or $341 a week.
- Only the slice of income inside each bracket is taxed at that bracket's rate. A pay rise never taxes your whole salary at the new rate.
- The ATO schedules work in whole dollars and assume every pay repeats all year, which skews collection slightly high for anyone with a variable year.
- A refund is that skew coming back: withholding overshot the tax your assessment actually required.
The calculation at a glance
Four steps, shown here for a resident on $85,000 claiming the tax-free threshold, paid fortnightly, no HELP debt, 2026-27 rates.
| Step | What happens | Figure |
|---|---|---|
| 1. Annualise | $3,269 per fortnight × 26 pays | $85,000 |
| 2. Apply brackets | 2026-27 resident scale, slice by slice, less offsets | $16,020 |
| 3. Add Medicare levy | 2% of taxable income | $1,700 |
| 4. Divide back | $17,720 ÷ 26 pays | $682 |
Skip the maths: calculate it
The PAYG calculator runs this exact chain on your own salary, with HELP repayments, super and the no-threshold scale included, and shows the result per week, fortnight, month and year.
Step 1: start with the 2026-27 brackets
Everything hangs off the annual rate scale. For residents in 2026-27: nothing to $18,200, then 15% to $45,000, 30% to $135,000, 37% to $190,000 and 45% beyond. The 15% rate is the new figure from 1 July 2026, down from 16%. The full scales, including non-resident and working holiday maker versions, are on the 2026-27 tax brackets page.
The critical mechanic: rates apply to slices, not to the whole. Earning $85,000 does not mean paying 30% of $85,000. It means paying 0% on the first slice, 15% on the next, and 30% only on the part above $45,000. Your marginal tax rate is the rate on the top slice; your effective rate is the blend across all of them.
Step 2: tax on $85,000, line by line
Resident, tax-free threshold claimed, 2026-27
Incomes under $66,667 also pick up the low income tax offset, worth up to $700 in 2026-27. It is built into the withholding scales for people claiming the threshold, which is why low earners see slightly less withheld than the raw bracket maths suggests.
Step 3: from annual tax to your payslip
Employers do not run this arithmetic by hand each payday. The ATO publishes the result pre-computed: Schedule 1, the statement of formulas (NAT 1004), plus look-up versions for each pay cycle in the 2026-27 tax tables. Payroll software reads your gross for the period, finds the row, and withholds the listed amount. The tables were reissued from 1 July 2026 for the 15% rate cut, so a payslip after that date should already show slightly lower withholding than June's.
The same annualise-then-divide logic runs in every cycle: a weekly earner's pay is effectively multiplied by 52, a monthly earner's by 12, and the annual tax divided back the same way. On our example that is $341 a week, $682 a fortnight or $1,477 a month, all landing on the same $17,720 across the year.
Gross to net: the numbers meeting on one payslip
$85,000 salary, fortnightly pay, 2026-27
Why withholding rounds against you
Two design choices in the schedules push the collected total slightly above the pure maths, on purpose:
- Whole dollars only. Under Schedule 1, cents are dropped from earnings before the formula applies and the withheld amount is rounded to the nearest dollar. Small per-pay roundings compound over 52 pays.
- Every pay is treated as a full-year pattern. The schedule assumes this fortnight's pay is what you earn all 26 fortnights. Overtime, a bonus or a penalty-rate weekend gets withheld as if you earned it every period, at a marginal rate you may never actually reach across the year.
The ATO would rather refund you in August than chase a debt in November, and most taxpayers prefer the same. The cost is an interest-free loan to the Commonwealth for anyone whose income is lumpy: casuals, shift workers, anyone who started a job mid-year.
Why refunds happen
A refund is not a gift. It is the difference between what the schedules collected and what your assessment actually required, and it has four usual causes:
- Deductions. The schedules assume zero. Every deductible dollar you claim at lodgment shrinks taxable income below what withholding priced in.
- Part-year work. Six months of full-time pay is withheld as if the salary ran all year, but the annual tax on half a year's income is far less.
- Variable pay. The big fortnights are withheld at annualised marginal rates the full-year total never justifies.
- Rounding. The whole-dollar bias above, small but always in the ATO's favour during the year.
The reverse cases produce bills: a second job wrongly claiming the threshold, undeclared HELP debts, or untaxed side income. Your income statement in myGov shows exactly what was withheld to compare against the assessment; the income statement guide covers reading it.
What changes the calculation
The chain above is the base case. Three declarations bend it, all covered in the PAYG withholding guide:
- Not claiming the tax-free threshold. The 0% band disappears and withholding starts at 15% from the first dollar. On $85,000 that lifts the annual figure from $17,720 to $20,450, which is why the choice matters so much on second jobs. The rules are in the tax-free threshold guide.
- Declaring a HELP debt. Adds a repayment component once annualised pay passes $69,528 (2026-27), at 15c per dollar in the first band.
- Residency. Non-residents are withheld at 30% from the first dollar with no Medicare levy and no threshold.
Frequently asked questions
How is PAYG tax calculated?
How is tax calculated on income for the year?
Is PAYG calculated on gross or net pay?
Does the PAYG calculation include superannuation?
Why is my bonus taxed so heavily?
How much tax should I pay on my income?
Why does my payslip differ from my own bracket maths by a few dollars?
Sources
- ATO: Tax rates for Australian residents 2026-27
- ATO: Schedule 1: statement of formulas for calculating amounts to be withheld (NAT 1004)
- ATO: Tax tables, updated for 1 July 2026
Related resources
PAYG Calculator
The full chain run on your own salary
Open →Tax Brackets 2026-27
The scale every calculation starts from
Open →Tax Tables 2026-27
The per-pay amounts employers look up
Open →
Narelle Hartigan is a CPA-qualified tax accountant with over a decade of experience in Australian personal taxation and payroll. She founded PAYG Calculator Australia to make tax withholding easy for every Australian worker to understand.