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How much tax should I pay on a second job? Claiming the tax free threshold.

Started July by
Modified a month ago by

Question

 Hi, I work two jobs and would like to know how much more tax I will have to pay on my second job?

Answer

If you’re an Australian resident for income tax purposes, you’re entitled to earn up to $18,200 a year tax free – this is known as the tax free threshold. By claiming the tax free threshold, the amount of tax withheld from your pay will be reduced throughout the year.

When you start a job, your payer (employer) will give you a Tax file number declaration to complete. You tell your payer you want to claim the tax-free threshold by answering Yes at question 8 'Do you want to claim the tax-free threshold from this payer?’ Each employer withholds tax from you separately - this means that your original employer isn’t aware of the amount of tax withheld by the second employer and vice versa. This is why you can usually only claim the tax-free threshold from one employer at a time.

If you believe you will be earning more than $18,200 in your primary job, it’s usually ‘safer’ for the higher rate of tax to be withheld from your second job, because the tax-free threshold has already been taken into consideration by your original employer’s payroll.

As an example:

  • Say your first job earns you $20,000, and your second job earns you another $10,000.You'll notice that not enough tax was withheld because both jobs were reducing the total annual income by $18,200 – meaning you effectively weren’t paying tax on most of your income.
  • If the tax free threshold is claimed on both jobs, employer one will withhold $6 a week throughout the year (as per the weekly tax table), while employer two withholds $0 – so the total withheld is only $312. However, according to the simple tax calculator, the tax payable on your total income ($30,000) is $2,242 – leaving you with a bill for $1,930.
  • Let's try again, but without claiming the threshold on job 2. Because of this, employer two withholds $2,184 throughout the year, which (along with the $312 withheld by employer one) covers the liability and entitles you to a small refund. Smiley Happy

You can work out how much tax should be withheld using the tax tables or the tax withheld calculator in the ATO App that best align with your pay period. If you’re a casual employee or get paid daily, make sure to use the tax table for daily and casual workers so you can be sure you're looking at the correct amounts to be withheld.

 

Question

 What if I've only had one job at a time, but I've changed jobs this financial year? Can I still claim the tax free threshold?

Answer

Sometimes claiming the tax free threshold can lead to a tax bill when you change jobs. Your new employer doesn't know how much tax has already been withheld for you, so they can't withhold extra to make sure you won't get a bill - and in some cases, your old boss doesn't even have to tell us how much tax has been paid until the end of the financial year.

 

Let's look through two examples to explain what can happen when you claim the tax free threshold multiple times in one year. We'll assume you don't have any tax deductions so we can keep it simple. 

 

  • In scenario A, you switch from one job where you earn $56,316 a year to a new job where you earn $60,320. Your former employer withheld $422 a fortnight (based on $2166/fortnight) for 12 weeks; your new employer withholds $476 a fortnight (based on $2320/fortnight) for the rest of the year. When we calculate your tax, we’ll look at how much tax you should pay on your assessable income. Based on the individual income tax rates, we’ll work out your tax as follows:
    Assessable income - lower end of tax bracket x tax rate + base tax + Medicare levy = tax payable
            59396 -  37000 x 0.325 + 3572  + 1187.92 = 12038.62
    Your employers should have withheld the following:
    Tax withheld job 1 + tax withheld job 2 = total tax withheld     
           (422 x 6) + (476 x 20) =  2532+ 9520 = 12052
    Balancing accounts:
    Tax withheld – tax payable = Debit or Credit
           $12052.00 – $12038.62  = $13.38 CR (tax refund)

In this example, even though the tax free threshhold has been claimed on both jobs, there's a slight refund available because enough tax was withheld to cover the tax debt.


Let’s change the situation a little and assume you have a higher education loan account (HECS or HELP) debt as well:

  • In scenario B, you switch from one job where you earn $56,316 a year to a new job where you earn $60,320. Your former employer withheld $466 a fortnight ($422 tax + $44 HELP repayments based on $2166/fortnight) for 12 weeks; your new employer withholds $568 a fortnight ($476 tax + $92 HELP repayments based on $2320/fortnight) for the rest of the year.
    Based on the individual income tax rates, we’ll work out your tax as follows:
    Assessable income - lower end of tax bracket  x  tax rate + base tax + Medicare levy + compulsory HELP repayment  rate = tax payable
            59396 - 37000 x 0.325 + 3572  + 1187.92 + (59396*0.04)  = 14414.43 
    Your employers should have withheld the following:
    Tax withheld job 1 + tax withheld job 2 = total tax withheld     
          (466 x 6) + (568 x 20) =  2796+ 11360 = 14156 withheld
    Balancing accounts:
    Tax withheld – tax payable = Debit or Credit
           $14156.00 – $14414.43  = $258.43 DR (tax bill)

In this case, claiming the tax free threshhold on both jobs means that there isn't enough tax withheld to cover the total tax and HELP repayment bill.

 

It's worth keeping in mind these examples are deliberately simple - in most cases, people will have other items like deductions and offsets that will affect the final outcome. You should also remember that yes, you can choose to claim the tax free threshold from your employer if you want to.

You can also choose to ask your employer to withhold a little extra from each pay to help reduce the likelihood of getting a bill. This is known as an upwards variation - and you only need to provide written advice explaining how much extra you'd like withheld per pay period (either in dollar amount or as a percentage).

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