PAYG Withholding vs PAYG Instalments: The Difference Explained

Key takeaways

Withholding (PAYGW): employer deducts tax from wages every payday and remits it for you.
Instalments (PAYGI): you prepay tax on business, rental and investment income, usually quarterly, after the ATO enrols you automatically.
The income type decides the system, not you. Wages can only ever be withheld; untaxed profit and investment income can only be collected through instalments.
You can be in both at once. An employee on $95,000 with $15,000 of net rent has withholding on the salary and prepays about $1,200 a quarter on the rent under 2026-27 rates.
Both are credits at assessment. Neither is an extra tax, and overpayments under either system come back as refunds.
Exit works differently: withholding stops when the job stops; instalments end when income falls under the entry thresholds or the ATO withdraws you on request.

The difference in one table

	PAYG withholding	PAYG instalments
Who is in it	Employees, directors, some contractors; every employer as the collector	Sole traders, landlords, investors, companies, super funds
Income covered	Salary, wages, allowances, directors' fees	Business profit, rent, interest, dividends, distributions
How it is collected	Deducted from each pay by the employer, remitted to the ATO	You pay the ATO directly, quarterly, by amount or rate
How you enter	Automatically, the day you start a job	ATO enrols you after a return shows $4,000+ instalment income and $1,000+ tax owing
Documents	TFN declaration, payslips, income statement	Instalment notice, activity statement
How you exit	Employment ends, withholding ends	Income drops under thresholds, or you request withdrawal after ceasing the activity

Swipe right →

Each side has its own tool: the PAYG withholding calculator for per-pay deductions from wages, and the PAYG instalment calculator for the quarterly figure on business or investment income.

Which one applies to you?

Employee only

Withholding, nothing else. Your employer handles the whole thing, and your involvement is limited to the declarations that set the rate: residency, HELP debt and whether you claim the tax-free threshold.

Sole trader

Instalments only, once your first profitable return trips the thresholds. Nothing is withheld from your invoices during the year, so the ATO collects quarterly. Sole traders in their first year sit outside both systems and should be setting the tax aside themselves.

Employee with a rental or side income

Both at once. Withholding keeps covering the wages, and instalment notices arrive for the untaxed slice once it crosses the entry rules. The two run independently: varying an instalment does not touch your payslip, and extra withholding does not cancel a notice.

Company or trust

Both, wearing different hats. The entity pays instalments on its own income, and simultaneously operates withholding as an employer for its staff. The two obligations appear side by side on the same activity statement, labelled PAYGI and PAYGW.

Worked example: salary plus rental

A resident earns $95,000 in salary and clears $15,000 of net rent in 2026-27, taking taxable income to $110,000.

How each system covers its slice (2026-27)

Tax and Medicare on $95,000 salarycovered by employer withholding each payday$20,920

Extra tax from the $15,000 of rentno one withholds this, so instalments collect it$4,800

Quarterly PAYG instalment on the rental slice$1,200

Total 2026-27 tax and Medicare on $110,000$25,720

Credited back at assessment100%

The rental slice is taxed at the top of the stack, 30% plus Medicare levy in this bracket, which is why $4,800 on $15,000 looks steeper than the average rate on the salary. Without instalments, that amount would land as a single bill at assessment.

Moving between the systems

Job changes move people across the line constantly. Go from employment to contracting and withholding stops with your final payslip, but instalments will not start until the ATO sees your first sole trader return, leaving a gap year where the tax is entirely yours to budget. Go the other way, from business back to wages, and instalment notices keep arriving until a lodged return falls under the thresholds or you ask the ATO to withdraw you. Ignoring the notices is not an exit: unpaid instalments accrue interest as ordinary tax debts. The exit rules and variation options are covered in the PAYG instalments guide.

Frequently asked questions

What is the difference between PAYG withholding and PAYG instalments?

Withholding is tax an employer deducts from wages each payday. Instalments are quarterly prepayments you make yourself on business and investment income. Both prepay income tax and both are credited at assessment; they differ in who collects and which income they cover.

Can I be in both PAYG systems at the same time?

Yes, and many people are. Wages stay under employer withholding while rental, business or investment income above the entry thresholds is collected through instalment notices. Each covers its own slice.

Are PAYG instalments extra tax on top of withholding?

No. Instalments prepay the tax on income that withholding never touched. At assessment, both streams are credited against one combined bill, and any overpayment is refunded.

Which one goes on a BAS?

Both can appear on an activity statement, as separate labels: PAYGW for amounts an employer withheld from staff wages, PAYGI for the entity’s own instalment. A sole trader with no employees only ever sees the PAYGI label.

How do I stop paying PAYG instalments?

Lodge a return with instalment income back under the entry thresholds and the ATO exits you automatically, or ask to be withdrawn if you have ceased the business or sold the income-producing asset. Varying to zero is a stopgap, not an exit.

Why did I get an instalment notice when tax already comes out of my pay?

Because your last return showed enough untaxed income, typically rent, interest, dividends or side business profit, to cross the entry thresholds. The notice covers that income only; your salary withholding continues unchanged.

Sources

ATO: PAYG withholding
ATO: PAYG instalments overview

Related resources

Guide