Withholding Allowance in Australia: 2025 Guide for Employees

With every pay cycle, Australian workers notice deductions from their gross salary—taxes, superannuation, and sometimes a line for ‘withholding allowance.’ But what exactly is a withholding allowance, and how does it impact your financial life in 2025? As the ATO rolls out updated tax rates and policies, understanding withholding allowances has never been more crucial for employees and payroll managers alike.

What Is a Withholding Allowance?

A withholding allowance is the portion of your income exempt from tax withholding by your employer. It determines how much tax is deducted from your regular pay. In Australia, this is governed by the ATO’s Pay As You Go (PAYG) withholding system. Each employee’s withholding amount is calculated based on the information provided on their Tax File Number (TFN) declaration and any additional forms related to tax offsets or special circumstances.

• Standard withholding: Most employees have tax withheld at standard rates unless they claim tax offsets or have special status (such as being under 18 or a senior Australian).
• Claiming allowances: Employees can claim allowances for things like the tax-free threshold, the Seniors and Pensioners Tax Offset, or zone tax offsets. These claims reduce the amount of tax withheld from each pay.

For example, if you claim the tax-free threshold (currently $18,200 per year), less tax is taken out of your pay. If you don’t claim it, more tax is withheld, but you may receive a larger refund when you lodge your tax return.

2025 Policy Updates and Their Impact

The 2025 tax year brings several updates that change how withholding allowances are calculated. The most significant shift is the adjustment of tax brackets and the continued rollout of Stage 3 tax cuts. These changes, passed in the 2024 federal budget, aim to simplify the tax system and put more money in the hands of Australian workers.

• New tax brackets: The 2025 income tax thresholds mean many Australians will see a reduction in PAYG withholding due to lower marginal rates.
• Updated ATO forms: The ATO has released revised TFN declaration and withholding declaration forms to reflect the new offsets and eligibility rules for 2025.
• Digital payroll systems: Most employers now use Single Touch Payroll (STP) Phase 2, which automatically applies updated withholding tables as of July 2025, ensuring accurate deductions with less paperwork for employees.

For example, if you previously fell into the $45,001–$120,000 tax bracket but now benefit from a lower marginal rate, your withholding allowance effectively increases, and your take-home pay rises.

How to Adjust Your Withholding Allowance

If your circumstances change—such as starting a second job, becoming eligible for new tax offsets, or your residency status changing—you may need to update your withholding details. Here’s how to make sure your payslip stays accurate:

1. Complete or update your TFN declaration: Inform your employer of any changes to your tax situation. This is essential when switching jobs, becoming an Australian resident for tax purposes, or turning 18.
2. Submit a withholding declaration: Use this form to claim or stop claiming the tax-free threshold, or to advise about other entitlements that affect your withholding.
3. Check your payslip regularly: Make sure your withholding aligns with your expectations, especially after a policy update or when your personal situation changes.

Remember, over- or under-withholding can result in a tax bill or a refund at year-end. Real-world example: If you start a side hustle in 2025, you might need to adjust withholding at your main job to avoid a surprise tax debt.

Real-World Scenarios: Getting Withholding Right

Consider two common situations:

• Multiple jobs: Only claim the tax-free threshold from one employer. Claiming from both can result in under-withholding and a tax bill.
• New tax offsets: In 2025, the Low and Middle Income Tax Offset (LMITO) is no longer available. Relying on last year’s withholding patterns could mean less take-home pay if you don’t update your details.

Proactive management of your withholding allowance ensures you’re not caught off guard at tax time and can help smooth your cash flow throughout the year.