Why the tax on your paycheque changed in January

The first pay of the year often arrives a few dollars different from the last one in December, with no raise, no new job and no letter explaining why. For 2026 the explanation was not mainly the federal tax cut, even though that cut was the year’s biggest tax story. By January, payroll had already been using the lower rate for six months.

What changes a January pay stub is a set of quieter adjustments that happen every year, plus, in 2026, one or two that were specific to the mid-2025 tax changes. Knowing which is which makes it easier to tell an ordinary January from a payroll mistake.

The pay stub that looked different

The tax withheld from a paycheque is not the tax you owe. It is an estimate, worked out each pay period as if that period’s pay continued all year, using the credits you declared to your employer. The estimate is reconciled with the real figure when you file. That is why a January change in withholding is not necessarily a change in your tax for the year, a point taken further in our file on why a bigger refund is not the same as paying less tax.

Payroll runs on published formulas

Employers and payroll software calculate withholding from formulas the Canada Revenue Agency publishes in guide T4127, Payroll Deductions Formulas, along with tables and an online calculator built on them. A new edition normally takes effect on January 1, and a second one on July 1 when mid-year changes require it. The 122nd edition took effect on January 1, 2026; the 123rd on July 1, 2026.

The January edition carries the new year’s indexed brackets and credit amounts, any rate changes, and the year’s figures for payroll contributions. Most of what people notice in January comes from that switch.

The federal rate barely moved in January

The lowest federal rate fell from 15% to 14% as of July 1, 2025, as explained in our file on the federal tax cut. Because the first half of 2025 had already been taxed at 15% through payroll, the 2025 rate for the whole year was set at 14.5%. According to the CRA’s 2026 payroll guide, payroll used a prorated 14% from July 2025 to arrive at that annual figure.

So the federal rate used on a December 2025 paycheque and on a January 2026 paycheque was the same: 14% on the first bracket. The full-year benefit of the cut shows up on the 2026 return. On the pay stub itself, the federal rate change happened in July 2025, not in January.

Indexation: same pay, slightly less tax

Federal brackets and most credit amounts rose by 2.0% for 2026. The first bracket now ends at $58,523, and the basic personal amount is $16,452, explained in our file on the basic personal amount. The Canada employment amount, a credit for employees, rose to $1,501. For someone whose pay did not change, indexing means slightly less federal tax withheld per pay. The effect is small, a few dollars per pay at typical incomes, but it is real.

Yearly maximums start again

Some payroll contributions, including employment insurance premiums, stop once an employee has paid the annual maximum. For people with higher earnings that can happen in the autumn, so their November and December pay is larger. On January 1 the count starts again, and the contributions return. For these employees, the January pay can be noticeably smaller than December’s, even though nothing about their tax has changed. It is the most common reason for a January drop, and it has nothing to do with income tax rates.

Provincial changes, including one that went up

Provincial and territorial tax is withheld on the same paycheque, and provinces change their own amounts. The CRA’s January 2026 guide lists, among others:

• Alberta introduced a new 8% lowest bracket for 2025 and later years. Payroll used a prorated 6% from July 1, 2025 to reach 8% for the year. In January 2026 the payroll rate returned to 8%, so Alberta withholding on that slice rose compared with the second half of 2025, even though the annual rate did not change.
• Saskatchewan raised its basic personal amount to $20,381 for 2026, including a $500 increase plus indexation.
• Prince Edward Island raised its basic personal amount to $15,000.
• Manitoba did not index its basic personal amount or its brackets for 2026; the maximum basic amount stays at $15,780.

The same logic that made the federal January change small made Alberta’s January change go the other way. A temporary payroll rate that catches up for half a year ends when the year ends.

The year-over-year difference, worked through

The table compares federal tax for a full year on the same taxable income in 2025 and 2026, using only the basic personal amount as a credit. It shows the annual effect of the lower rate and indexing together, spread over 26 pay periods.

The year-over-year saving in this example is about $8 a pay. But because payroll already used 14% from July 2025, much of that saving was already visible in the autumn of 2025, and the step from December to January was smaller still.

The TD1 nobody updates

The federal TD1, Personal Tax Credits Return, tells your employer which credits to build into withholding. The CRA’s employers’ guide says employees do not have to fill out a new TD1 every year if their credit amounts have not changed, but should give a new one within seven days of a change. Three situations catch people out:

• Two jobs at once. If credits are already claimed on another employer’s TD1 and total income will be higher than those credits, the second TD1 should claim zero. Claiming the basic amount twice means too little tax withheld and a balance owing in spring.
• Extra income without withholding. The TD1 lets you ask for an additional amount to be withheld each pay. It stays in place until you file a new form.
• Large deductions the TD1 does not cover. Form T1213 asks the CRA for permission to reduce withholding for deductions and credits outside the TD1, such as child care expenses or charitable donations.

What to check

SOURCES ON FILE

1. Canada Revenue Agency — T4127 Payroll Deductions Formulas, 122nd edition, effective January 1, 2026 — federal and provincial changes for 2026, including the prorated 2025 payroll rates.
2. Canada Revenue Agency — T4127 Payroll Deductions Formulas, 123rd edition, effective July 1, 2026 — the mid-year edition.
3. Canada Revenue Agency — Employers’ Guide, Payroll Deductions and Remittances (T4001) — when a new TD1 is needed and the rule for more than one employer.
4. Canada Revenue Agency — TD1 forms for 2026 — federal and provincial personal tax credits returns.

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