But they serve different purposes.
PAYG instalments are payments towards your own income tax on business and investment income. PAYG withholding is tax you withhold from certain payments to other people and send to the ATO.
Understanding the difference helps you plan cash flow and make sense of the amounts you’re being asked to report and pay.
The difference at a glance
| Question | PAYG instalments | PAYG withholding |
|---|---|---|
| What is it for? | Prepaying your own income tax | Sending the ATO tax withheld from payments to others |
| A common example | A sole trader paying instalments towards tax on business income | An employer withholding tax from an employee’s wages |
| Do you need employees? | No | Employees are a common reason, but other payments can trigger withholding |
| Can a business have both? | Yes | Yes |
What are PAYG instalments
PAYG instalments spread income tax payments through the year. The ATO may enter you into the system after reviewing your tax return, or you may enter voluntarily. Payments are usually quarterly, although the ATO will tell you the arrangements that apply.
Instalments are credited against your income tax assessment. You still lodge your annual return, which determines the final outcome. Making instalments does not guarantee there will be no further tax to pay.
The Australian Government explains how PAYG instalments work, and the ATO answers common instalment questions.
What is PAYG withholding
PAYG withholding commonly applies when a business pays employees. You calculate the required withholding, deduct it from the employee’s gross pay and pay the employee the remaining amount. The withheld amount must then be reported and paid to the ATO under your obligations.
Withholding can also apply to certain other payments, such as payments to a supplier who has not quoted an ABN where withholding is required. You must register before you first need to withhold. See the Australian Government’s PAYG withholding guidance.
For cash flow planning, remember that the amount withheld is committed to the ATO. It isn’t extra money available to spend in the business.
A simple example of both
Alex runs a small business as a sole trader and employs one person.
When paying that employee, Alex deducts the required tax from their wages. That is PAYG withholding. Separately, Alex receives an ATO requirement to make instalments towards Alex’s own income tax on business income. Those are PAYG instalments.
Paying the employee’s withheld tax does not cover Alex’s personal income tax obligation. Both amounts need to be allowed for in the business’s cash flow.
This example assumes a sole trader. If your business operates through a company or trust, check whose liability each amount relates to with your adviser.
What if the instalment amount no longer fits
If business conditions change, your PAYG instalment amount or rate may be varied where appropriate. Get advice before reducing it: an amount that is too low can result in interest and potentially penalties.
An unexplained notice is a reason to ask questions, rather than assume it’s a duplicate bill. Bring the notice, your latest figures and details of any business changes to your adviser.
Keep tax payments easier to understand
At Bookflow, we’re registered tax agents with the Tax Practitioners Board (TPB). We can help you understand the different PAYG obligations and keep the supporting records organised.
We can work with your existing accountant, or chat about tax support if you need help in that area too. Our packages provide clear pricing and regular direct debit payments for agreed services.
Good books. Better flow.
Confused by a PAYG amount on your statement? Chat to Bookflow and let’s make sense of it.
General information checked on 29 October 2026. Your obligations depend on your business structure, payments and circumstances.