Underwithholding: How to Avoid a Tax Shock in 2025

For many Australians, the end of the financial year brings a nervous wait to see whether they’ll receive a refund or an unexpected tax bill. Underwithholding—the situation where too little tax is taken out of your pay or investment income—can leave you owing the ATO come tax time. In 2025, the issue is more relevant than ever, thanks to changes in tax rates, shifting work patterns, and new ATO compliance initiatives.

What Is Underwithholding and Why Does It Happen?

Underwithholding occurs when the tax withheld from your income during the year isn’t enough to cover your actual tax liability. This can happen for several reasons, including:

• Having more than one job or multiple income sources (including gig work, investments, or side hustles)
• Not updating your tax file number (TFN) declaration when you change jobs
• Incorrectly claiming the tax-free threshold with more than one employer
• Not accounting for changes in personal circumstances (like moving from full-time to part-time work)
• Receiving large bonuses, commissions, or lump-sum payments

In the past, many Australians relied on their employer’s payroll system to get withholding right, but in 2025, the lines are blurrier. The boom in contracting, hybrid work, and short-term gigs has created more opportunities for mistakes—and the ATO is watching closely.

2025 Policy Updates: What’s Changed?

This year, the ATO has doubled down on ensuring Australians pay the right amount of tax as they earn. Key updates for 2025 include:

• New PAYG Withholding Schedules: Updated in line with the Stage 3 tax cuts, these schedules affect how much tax is withheld from your pay. If your employer hasn’t updated their payroll software, you could be underwithheld.
• Expanded Data Matching: The ATO now cross-checks more income sources, including gig economy platforms, digital marketplaces, and investment accounts. Undeclared income is more likely to be detected, and underwithholding penalties can apply.
• Real-Time Alerts: Some employees are now receiving real-time notifications if the ATO detects potential underwithholding based on their reported income and tax withheld. This gives taxpayers a chance to correct course before tax time.

Example: Sarah, a Melbourne-based graphic designer, works two part-time jobs and freelances on the side. In 2024, she claimed the tax-free threshold at both employers. When she lodged her 2024–25 tax return, she owed $2,100 in tax, plus an interest penalty, because her combined income pushed her into a higher tax bracket and her withholding was too low.

How to Avoid Underwithholding in 2025

To steer clear of underwithholding—and a nasty tax surprise—here are some practical steps Australians can take this year:

• Review Your TFN Declarations: Only claim the tax-free threshold with one employer at a time. If you have multiple jobs, make sure your secondary employer withholds at the higher rate.
• Use the ATO Tax Withheld Calculator: The ATO’s online tools can help you check if the right amount is being withheld based on your total income situation.
• Tell Your Employer About Extra Income: If you expect significant bonus, commission, or investment income, let your payroll team know—they can increase your withholding to match your tax rate.
• Check Your Payslips: Make sure the correct withholding is applied after any pay changes, and that your super and other entitlements are being paid correctly.
• Consider Voluntary Withholding: For gig economy or investment income, you can make voluntary PAYG instalments to avoid a lump-sum bill later.

For retirees or investors, underwithholding can also arise from dividend, rental, or managed fund income. The ATO’s 2025 changes mean these sources are now tracked more closely, so proactive record-keeping is essential.

The Bottom Line: Stay Ahead of the ATO

Underwithholding may feel like a minor payroll hiccup, but it can lead to expensive surprises and penalties if not caught early. With the ATO’s enhanced data-matching and real-time alerts in 2025, Australians need to take greater responsibility for their tax affairs—especially if your income is complex or comes from multiple sources.

Don’t wait until tax time to find out you’ve underpaid. A little vigilance today can save you a lot of headaches (and dollars) tomorrow.