What is Withholding?
Withholding tax refers to process of deducting taxation from an a payment to a person, and paying this over to the government on their behalf. Governments use this method of withholding tax in order to minimize the risk of tax evasion and to reduce the costs of collection.
For example and employer normally deducts tax from an employees pay or a business will deduct tax from a dividend payment before paying the shareholder. The deduction is paid over to the government and treated as an on account payment by the person towards their final tax liability.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.