Key takeaways
- PAYG = Pay As You Go, the ATO's pre-collection system for income tax. It is not a separate tax, just an early payment of the tax you already owe.
- PAYG withholding (PAYGW) is for wages: your employer deducts tax before you are paid and sends it to the ATO.
- PAYG instalments (PAYGI) are for business and investment income: you prepay the tax yourself, usually quarterly, after the ATO enrols you.
- Same income, same tax. On $85,000 in 2026-27 the tax and Medicare come to $17,720 either way: an employee has about $682 withheld each fortnight, a sole trader prepays about $4,430 each quarter.
- Everything collected under PAYG is credited against your assessment when you lodge. Withhold or prepay too much and the difference comes back as a refund.
- You can be in both systems at once: wages under withholding plus a rental property or side business under instalments.
What does PAYG stand for?
PAYG is Pay As You Go: tax collected as the income is earned, not months later. The Commonwealth introduced it in July 2000 to replace a patchwork of older systems (PAYE for employees, provisional tax for everyone else) with one label and one set of rules. The label covers two mechanisms that share a goal but work completely differently, which is why an accountant will always ask "withholding or instalments?" when PAYG comes up.
The goal is cash flow, in both directions. The government gets tax revenue smoothly across the year, and you avoid a five-figure bill landing in one hit after you lodge. Every dollar collected under either side of PAYG is a prepayment of income tax on your taxable income, reconciled when your tax return is assessed.
PAYG withholding vs PAYG instalments at a glance
One table, both sides. If you remember nothing else: withholding is done to you by an employer, instalments are done by you after the ATO sends a notice.
| PAYG withholding (PAYGW) | PAYG instalments (PAYGI) | |
|---|---|---|
| Who it covers | Employees and other payees paid wages, salary, directors' fees, some contractors | Sole traders, investors, landlords, companies and super funds with untaxed income |
| Income it covers | Salary and wages an employer pays you | Business profit, rent, interest, dividends, trust distributions |
| Who does the work | Your employer calculates, deducts and remits | You pay the ATO directly each quarter |
| How often | Every payday, automatically | Usually 4 times a year, on instalment notices |
| Paperwork you see | TFN declaration, payslips, income statement in myGov | Instalment notice or activity statement |
| Tax on $85,000 (2026-27) | $17,720 ($682/fortnight) | $17,720 ($4,430/quarter) |
| How you exit | Stops when the job stops | Automatic once income falls under the entry thresholds, or on request |
Put your own numbers in
The table uses $85,000 because it sits near full-time average earnings. For your own salary or profit, the PAYG calculator applies the 2026-27 rates bracket by bracket and shows the annual figure alongside the per-pay and per-quarter versions.
How the PAYG system works
Australia taxes individuals on an annual cycle: income year from 1 July to 30 June, tax return lodged after that, assessment issued. PAYG runs ahead of that cycle. During the year, money is collected against the bill the assessment will eventually confirm. At assessment, the ATO adds up your actual tax, then subtracts everything already collected under PAYG. Three outcomes are possible: a refund if too much came in, a bill if too little did, or close to zero if the estimates tracked reality.
The two sides exist because income arrives in two ways. Wages come through an employer, so the law makes the employer the collection point. Business and investment income has no third party in the middle, so the ATO bills you directly in quarterly slices based on your last tax return. Which side you meet is decided entirely by the type of income, not by choice. The full breakdown of who lands where is in withholding vs instalments.
PAYG withholding: the wages side
When you start a job you complete a TFN declaration, telling your employer your residency status and whether you claim the tax-free threshold. From then on, every payday, the employer looks up your pay in the ATO withholding schedules, deducts the listed amount and reports the payment to the ATO through Single Touch Payroll. You receive the net amount. The withheld tax is remitted to the ATO on a monthly or quarterly cycle depending on the employer's size.
For an $85,000 salary in 2026-27, the schedules take roughly $682 out of each fortnightly pay, adding up to about $17,720 across the year including Medicare levy. The amount flexes with each pay: a bigger fortnight means more withheld, an unpaid week means less. Employees never send the ATO anything themselves. The employer obligations, withholding cycles and registration steps are in the PAYG withholding guide.
PAYG instalments: the business side
No employer stands between a sole trader and their income, so the ATO collects directly. After you lodge a return showing $4,000 or more of business or investment income and a tax bill above $1,000, the ATO enrols you automatically and sends quarterly instalment notices. You pay either a pre-calculated amount based on your last return, or a rate applied to each quarter's actual income.
A sole trader clearing $85,000 profit prepays about $4,430 a quarter under 2026-27 rates. Instalments surprise people because enrolment is automatic: the first many hear of it is a notice in myGov after a good year, a first rental property or a large interest payout. Entry rules, the amount and rate methods, due dates and variations are covered in the PAYG instalments guide.
When both apply to you at once
Common scenario: a salary plus a rental property. The employer keeps withholding on the wages as normal, and the ATO issues instalment notices for the tax on the rent once your return crosses the entry thresholds. Each system covers its own slice of income, and both streams of prepayment meet at your assessment as credits against one combined bill.
Withholding only
- One or more jobs, no side income
- Wages plus bank interest under the instalment thresholds
- Second job (both employers withhold)
Instalments involved
- Sole trader or partnership profit
- Employee with rental income above the thresholds
- Share portfolio throwing off significant dividends
- Company or super fund with taxable income
PAYG vs your final tax bill
PAYG never decides how much tax you owe. The 2026-27 tax brackets, Medicare levy, offsets and your deductions decide that at assessment. PAYG only decides when the money moves. That distinction answers most of the questions people ask about the system: a refund means PAYG collected more than the assessment required, a bill means it collected less, and neither means the system got your tax "wrong" in any permanent sense.
The mechanics of turning annual brackets into a per-pay deduction, and why the schedules deliberately round against you, are worked through in how PAYG is calculated.
Where PAYG shows up in real life
- Payslip: the line labelled tax, PAYG or PAYGW is the withholding taken from that pay.
- Income statement: the year-to-date wages and withholding your employer reports through Single Touch Payroll, visible in myGov. Where to find it is in the income statement guide.
- Instalment notice: the quarterly PAYGI demand in myGov or the mail, with the amount and rate options on it.
- Notice of assessment: the reconciliation. Withholding credits and instalment credits both appear here, subtracted from your assessed tax.
Frequently asked questions
What is PAYG in Australia?
What does PAYG stand for?
Is PAYG a separate tax?
Is PAYG the same as PAYE?
Who pays PAYG instalments?
What is PAYG on my payslip?
Does PAYG apply to ABN and sole trader income?
Do I get PAYG back at tax time?
Sources
- ATO: PAYG withholding
- ATO: PAYG instalments overview
- ATO: Tax tables (withholding schedules), updated 1 July 2026
Related resources
PAYG Withholding
The wages side: what comes out of pay and why
Open →PAYG Instalments
The business side: who pays quarterly and how much
Open →PAYG Calculator
Your 2026-27 tax, per year, per fortnight, per quarter
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.