How PAYG withholding is calculated on an Australian payslip

A payslip is not a tax return

Your employer is not allowed to guess your annual tax. It has to apply a published formula to the pay in front of it, as if that pay were representative of the whole year, and send that amount to the ATO. The formula is PAYG withholding Schedule 1, and the result is the single “tax” line on a typical resident payslip.

At the end of the year the ATO does something different. It adds up your taxable income and applies the resident brackets, the low income tax offset and the Medicare levy once. Those two methods are both correct and they are not the same calculation, which is why even a perfectly ordinary year produces a refund or a small bill. The take-home pay guide follows the year-end side; this one follows the payslip.

The formula, without the mystique

Schedule 1 converts whatever you are paid into a weekly equivalent, applies a pair of published coefficients for the band that weekly figure falls in, and rounds the answer to the nearest dollar. The coefficients already include the Medicare levy, which is why you do not see a separate 2% line.

x  = weekly equivalent of this pay, in whole dollars plus 99 cents
y  = a × x − b
tax = y, rounded to the nearest dollar

a and b come from the scale and the weekly earnings band. Scale 2 (tax-free threshold claimed) uses a smaller b in the lower bands because the $18,200 threshold has already been built in. Scale 1 (threshold not claimed) withholds as though every dollar is taxable, which is the right setting for a second job.

Why the weekly equivalent includes 99 cents

The ATO instructs payroll to treat weekly earnings as the whole-dollar amount plus 99 cents before applying the coefficients. It is a deliberate bias toward withholding a little more rather than a little less, so that an ordinary year is more likely to produce a refund than a debt. It is also why two calculators that both claim to use Schedule 1 can differ by a dollar if one of them skips that step.

Following $95,000 through a fortnightly pay

Take a resident employee on $95,000 a year who claims the tax-free threshold and has no study loan. The fortnightly gross is $95,000 ÷ 26 = $3,653.85. Schedule 1 Scale 2 converts that to a weekly equivalent, applies the 2026–27 coefficients for that band, and rounds.

The cases where withholding goes badly wrong

The formula is built for one job, a full year, and a pay that looks like every other pay. Change any of those and the estimate stops being close.

• A second job should not claim the tax-free threshold. If it does, both employers withhold as though the $18,200 is theirs to give, and the assessment will ask for the missing tax.
• Starting or leaving mid-year means the remaining pays are not a full year of income, so withholding is usually too high and a refund follows.
• Unpaid leave, a period of lower hours, or a mid-year pay rise all violate the “this pay is typical” assumption.
• A study loan uses a separate withholding scale on top of ordinary PAYG. The compulsory repayment is still assessed on annual repayment income, which is why HELP produces its own refund surprise — see the guide on HELP and HECS repayments.

What the OzCalc PAYG calculator models

The PAYG calculator applies Schedule 1 to a single pay — weekly, fortnightly, monthly or a one-off amount — with the tax-free threshold claimed or not. It is the tool to use when you want the line on a payslip, not the line on a notice of assessment.

It does not model bonuses, unused leave payouts, return-to-work payments or the working holiday maker scale. Family Medicare thresholds and the surcharge live on their own calculators. For the year-end brackets themselves, use income tax or read Australian income tax brackets for 2026–27.

Common questions