When an employee asks you to take more tax out of their pay, the ATO calls it an upward variation. Setting one up is simple:
- There's no ATO form to lodge.
- There's no ATO approval to wait for.
- You and the employee agree in writing.
After that, you withhold the extra amount on top of their normal tax every pay until they ask you to change or stop it.
This guide is for business owners, managers and bookkeepers who run payroll. It covers why employees ask for extra tax to be withheld, what the written agreement should include, how to work out the amount, common mistakes, and why withholding less tax works differently.
This is general information, not tax advice. It reflects ATO guidance as at November 2026, so check the ATO's page on withholding variations before you rely on it.
What is an upward variation?
PAYG withholding uses the ATO's tax tables to estimate how much tax to take from each pay. For most employees that's close enough.
Some employees still end up with a tax bill every year, because they have income that nobody withholds tax from. An upward variation covers that. The employee asks you to withhold more than the tax tables say, either as:
- a fixed extra amount, for example an extra $100 each pay, or
- a higher rate, for example withholding as if they earned more than you pay them.
The extra goes to the ATO with the rest of their PAYG withholding. At tax time it counts towards their tax bill like any other withheld amount.
Why employees ask for extra tax to be withheld
The ATO's example is someone with investment income, such as interest or dividends, that has no tax taken out. Other common reasons:
- rental income from an investment property
- a second job or side business
- capital gains they expect to make this financial year
- a pension or other income where too little tax is withheld
These employees would rather pay a bit more each pay than get one large bill after their tax return.
Do you need an ATO form or approval?
You don't need either. The ATO says that if you agree to an upward variation, you and the employee enter into a written agreement in any form that suits your business. Schedule 14 gives examples: an email, a paper form or a digital form.
There's nothing to lodge and nothing to wait for. The ATO says no additional records are needed, but keep the written request anyway. It shows what was agreed if anyone asks later.
Because it's an agreement, you don't have to say yes.
What the written agreement should include
Any format works, but a good request answers the questions payroll will have:
| Detail | Example |
|---|---|
| Employee's name | Jane Citizen |
| Type of request | New, change the amount, or stop |
| Extra amount | $100 |
| How often | Each pay |
| Start date | The first pay day it applies to |
| Agreement | "I ask you to withhold this amount in addition to my normal tax..." |
| Date of request | When it was signed or submitted |
Make it clear that the extra is on top of their normal tax, not instead of it, and that it stays in place until they ask in writing to change or stop it. Use the same process for changes and cancellations so every version is dated and kept in one place.
How to work out the amount to withhold
The ATO's Schedule 14 sets out the method. The current version applies to payments from 1 July 2026:
- Work out the normal amount to withhold from the usual tax table.
- Work out the additional amount from the employee's written request.
- Add them together. That total is what you withhold.
The ATO's example: an employee earns $563 a week and asks for an extra $50 a week. The normal amount is $33, so you withhold $83.
Setting it up in payroll
Most Australian payroll software has an extra tax or upward variation field in each employee's tax settings. Enter the amount there and the software adds it to every pay run and reports it through Single Touch Payroll as part of their PAYG withholding.
Two things to watch:
- Non-assessable payments. The ATO says an upward variation doesn't apply to them, so don't add the extra amount to those payments.
- Stopping. When an employee asks to stop, remove the extra amount before the next pay run and keep the request with the original.
Where upward variations go wrong
- No written request. A quick word in the lunchroom isn't an agreement. If the employee later disputes the deductions, you have nothing to show.
- Requests lost in email. The employee tells their manager, and the change never reaches payroll.
- The extra replaces their normal tax. Entering $100 as their total tax, instead of on top of the table amount, under-withholds badly.
- Old requests never stopped. The employee asked to stop in March, and payroll kept deducting until June.
All four come down to the same thing: payroll needs one clear, dated request, and needs to see it straight away.
Withholding less tax is different: downward variations
If an employee wants less tax withheld, for example because they expect large deductions or a rental loss, the decision isn't yours. The ATO has to approve it.
- The employee lodges a PAYG withholding variation application, usually online through myGov (ATO, then Tax, then Manage, then PAYG withholding variation), or on paper (NAT 2036).
- The ATO aims to process online applications within 28 days and paper ones within 56 days.
- You can't reduce their withholding until you receive the ATO's variation notice. It starts from the next available payday after you receive it and ends on the date in the notice.
- Keep the notice with your records for 5 years.
So: for more tax, agree in writing and update payroll. For less tax, wait for the ATO.
| Upward variation (more tax) | Downward variation (less tax) | |
|---|---|---|
| Who decides | You and the employee | The ATO |
| Paperwork | Written request, any format | PAYG withholding variation application |
| Starts | When you both agree | Next payday after you receive the ATO notice |
| Ends | When the employee asks to change or stop it | On the date in the ATO notice |
Payroll checklist
- Get the request in writing, and check it says the amount is in addition to normal tax.
- Check the amount, frequency and start date.
- Enter the extra amount in the employee's payroll tax settings.
- Check the first pay run shows the right total.
- File the request with the employee's records.
- Follow the same steps for any change or cancellation.
How Canyou handles this
Canyou is workforce compliance and employee onboarding software for Australian businesses. The forms you use for new starters also work for requests like this one. Build an "Extra tax withholding request" form once and employees can use it whenever they need to.
Employees start the request from their own dashboard, on their phone, and choose new, change or stop. When they submit it, completion notifications go to your payroll officer, bookkeeper or admins. Every request is saved in the employee's flow history, so you can see what was agreed and when.
Our help centre has the setup steps: how to set up extra tax withholding requests in Canyou. New starters already complete their TFN declaration in Canyou, so their tax details are in one place.
Try for free (no credit card required), or Book a demo.
Sources (checked 3 November 2026): ATO, Withholding variations; Varying your PAYG withholding; Schedule 14 - additional amounts to withhold; PAYG withholding variation application.
