PAYG instalments are quarterly pre-payments of your income tax liability. If you are a sole trader, freelancer, investor, or other non-wage earner whose last tax return showed more than $1,000 in tax payable and income over the entry threshold, the ATO will automatically enrol you in the PAYG instalment system. Rather than facing a large tax bill at year end, you pay tax gradually throughout the year — similar to how an employer deducts PAYG withholding from employees’ wages.
Who Enters the PAYG Instalment System?
The ATO automatically enrols you when:
- Your last tax return showed tax payable of $1,000 or more (after offsets and credits), AND
- Your income from business or investments was above the entry threshold (currently $4,000 for most taxpayers)
This commonly affects:
- Sole traders and freelancers
- Investors with significant dividend or rental income
- Rental property owners
- Self-managed super fund (SMSF) trustees
- Company directors earning director fees
You will receive an ATO notice advising you that you have been enrolled and stating your first instalment amount. After that, instalments appear pre-populated on your BAS or a separate Instalment Activity Statement (IAS) each quarter.
Two Methods for Calculating Your Instalment
Method 1 — ATO Instalment Rate (Calculated Method)
You multiply your instalment income (broadly, your business and investment income for the quarter) by the rate the ATO gives you. The rate is calculated from your last tax return.
$$\text{Instalment} = \text{Instalment income} \times \text{ATO rate}$$
Example: ATO rate is 12%. You earn $30,000 in business income in Q1.
Instalment = $30,000 × 12% = $3,600
This method automatically adjusts if your income fluctuates — lower income quarter means a lower instalment.
Method 2 — ATO Instalment Amount (Fixed Amount)
The ATO pre-calculates a fixed quarterly dollar amount based on your previous year’s tax liability divided by four. You simply pay that amount each quarter without needing to calculate anything.
Example: Your FY2024–25 tax was $16,000. The ATO sets your quarterly instalment at $4,000.
This method is simpler but may result in under- or over-payment if your income changes significantly from the previous year.
Which Method Should You Use?
| Method | Better when… |
|---|---|
| Rate method (income × rate) | Your income varies significantly quarter to quarter |
| Fixed amount | Your income is relatively stable and similar to the prior year |
You can switch between methods at any time by varying your instalment on the BAS or IAS.
Varying Your PAYG Instalment
If your income this year will be significantly lower than last year (e.g., a slow quarter, you’ve gone part-time, investment income has dropped), you can vary your instalment downward.
To vary:
- On your BAS or IAS, select the option to vary
- Enter your revised estimated annual income and estimated tax
- The system calculates a revised quarterly instalment
Important: If you vary your instalments down and your actual tax liability at year-end is more than 85% of the varied amount, the ATO will apply the instalment shortfall penalty (effectively GIC interest) on the shortfall. Varying down too aggressively can be costly.
Conversely, if you expect higher income than last year, you can increase your instalments voluntarily to avoid a large year-end tax bill.
PAYG Instalment Due Dates (FY2025–26)
| Quarter | Period | Due date |
|---|---|---|
| Q1 | 1 July – 30 September 2025 | 28 October 2025 |
| Q2 | 1 October – 31 December 2025 | 28 February 2026 |
| Q3 | 1 January – 31 March 2026 | 28 April 2026 |
| Q4 | 1 April – 30 June 2026 | 28 July 2026 |
PAYG instalments are typically paid on the same day as your BAS — they appear on the same form for quarterly BAS lodgers.
How Instalments Are Reconciled at Tax Time
At the end of the financial year, when you lodge your tax return, the ATO calculates your actual tax liability and credits all PAYG instalments you paid during the year.
$$\text{Tax payable at year end} = \text{Actual tax liability} - \text{Instalments paid}$$
- If you paid more than your actual liability → you receive a tax refund
- If you paid less → you pay the balance when you lodge
Exiting the PAYG Instalment System
You can request to exit the PAYG instalment system if you expect your business or investment income to fall below the entry thresholds (e.g., you stop running a business or sell your investment portfolio). Contact the ATO on 13 28 66 or notify them through your tax agent.
Related Articles
- Sole Trader Tax Australia
- BAS Explained
- BAS Deadlines and Penalties
- How Income Tax Works in Australia
- GST and Business Tax hub
Frequently Asked Questions
I’m a new sole trader — when will I enter the PAYG instalment system? In your first year of business, you will not be in the system (there is no prior year tax return to base the instalment on). Your first-year tax obligation is due when you lodge your return. From year two onwards, if your tax payable exceeded $1,000, the ATO will enrol you automatically.
Can I pay my PAYG instalments early? Yes. You can pay more than the required instalment at any time. The excess is credited against your final tax liability, potentially resulting in a refund or a smaller year-end payment.
Do PAYG instalments cover GST as well? No. PAYG instalments are pre-payments of your income tax. GST is reported and paid separately on your BAS. Both may appear on the same BAS form, but they are distinct obligations.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.