Most employees have tax deducted before they are paid, and most still end the year owing something or owed something. The mismatch is built into how withholding works.
Withholding is an estimate applied period by period
Employers deduct tax using tables or codes that convert a single pay period into an implied annual income and apply the appropriate rates to it.
The calculation assumes the current pay continues unchanged for the whole year, since the payroll system has no way to know what will happen later.
Any deviation from that assumption produces a discrepancy that only becomes visible when the year's actual figures are assembled.
Irregular pay distorts the estimate
A bonus, commission or overtime payment inflates the implied annual figure for that period, so the deduction can be calculated at a higher rate than the year ultimately warrants.
The reverse happens with unpaid leave or a mid-year job change, where a period of lower income leaves less tax deducted than the annual position requires.
Cumulative systems correct for this progressively across the year, while non-cumulative ones leave the reconciliation entirely to the end.
Multiple income sources compound the problem
Each employer or payer calculates deductions on the income it pays, without knowledge of what any other is paying.
Two moderate incomes can therefore each be taxed as though it were the only one, leaving the combined total underwithheld relative to the applicable band.
Investment income, rental income and self-employment earnings generally have no withholding at all, which shifts the entire liability to the annual return.
Reliefs and circumstances are not visible to payroll
Deductible expenses, charitable contributions, dependants and eligibility for various reliefs all affect the final calculation and are usually unknown to an employer.
Some systems allow these to be reflected through an adjusted code or declaration, which improves accuracy but relies on the individual keeping it current.
Where circumstances change mid-year, the code often lags, and the effect accumulates until the annual reconciliation catches it.
A refund is not a benefit
A large refund means more was deducted than required, so the excess was held by the authority without earning anything for the taxpayer.
Adjusting withholding to reduce it moves the money into the year it was earned, which is preferable provided the estimate does not swing into underpayment.
Rules on adjustment, penalties for underpayment and filing obligations differ by jurisdiction and change over time, so the current official guidance governs any particular case.