Glossary
Withholding Tax
Tax deducted from a payment before you receive it
Withholding tax is deducted by the payer before the remainder is handed over. Salary arriving with tax already removed is the familiar example.
The reason is collection certainty. Leaving individuals to pay later means some will not, so the tax is secured at the point of payment.
It applies to interest and dividends too. Deposit interest and share dividends arrive with tax already taken out, which is why the credited amount is smaller than expected.
Withholding is closer to a prepayment than a final assessment. At year-end filing it is compared with the actual liability, and you are refunded if too much was taken or billed if too little.
It gets complicated with foreign shares. The source country withholds on the dividend and your own country may tax it again. Tax treaties and foreign tax credits adjust for this, but it is worth checking. A withholding statement also serves as proof of income. It is frequently requested for loan applications and various filings, so keeping it is worthwhile. For freelancers, understanding that payments arrive already net of tax makes cash planning considerably easier.