PAYG Instalments Explained for Sole Traders (Australia)

PAYG instalments are regular prepayments of income tax that the ATO asks sole traders and investors to make during the year, so that tax on business and investment income is not all due in one lump after the tax return. You are entered automatically once your last return shows enough business or investment income and tax, and most sole traders then pay quarterly, either a fixed amount set by the ATO or a rate applied to what they actually earned. Every dollar paid is credited when you lodge your return.

This guide explains who pays, how the two options work, the quarterly due dates, how the 2026-27 GDP adjustment affects your amount, when to vary, and a worked example with numbers. It is general information, not tax advice; a registered tax agent can look at your situation.

What are PAYG instalments?

Employees have tax withheld from each pay. Sole traders, contractors and people with significant investment income do not, so without instalments they would face their entire year's tax after lodging. Pay as you go (PAYG) instalments fix that by collecting tax through the year, based on either your last assessed tax or your current income.

Instalments are calculated on instalment income: gross business and investment income such as sales, fees, interest, dividends and rent, excluding GST. Salary and wages with PAYG withholding are not included, and neither are most capital gains.

Who has to pay PAYG instalments?

Individuals, including sole traders, are generally entered automatically when their most recent tax return shows all of the following:

• instalment income of $4,000 or more,
• tax payable of $1,000 or more, and
• estimated notional tax of $500 or more.

There are exceptions, for example for some people of pension age or with tax losses. You can also enter voluntarily through myGov, your online services for business or a tax agent, which is often sensible in your first profitable year when the ATO has no history to trigger entry. If you are just starting, our guide on how to get an ABN covers the registration step that usually comes first.

Instalment amount vs instalment rate

Feature	Instalment amount option	Instalment rate option
How it is worked out	ATO sets a fixed amount from your last return, uplifted by the GDP adjustment	You multiply your instalment income for the period by the ATO's rate
Effort	Low; pay the figure on the notice	Higher; calculate GST-exclusive income each quarter
Tracks current income?	No	Yes
Best for	Steady income similar to last year	Growing, seasonal or falling income
Who can use it	Eligible small taxpayers, usually not registered for GST or small GST payers	Anyone in the system
GDP adjustment	Applies	Does not apply

For the 2026-27 income year, the ATO's GDP adjustment factor is 5%, applying to quarters starting on or after 1 April 2026 for instalments using the amount option. It does not affect you if you use the rate option or pay annually. The ATO publishes it on its GDP adjustment page.

PAYG instalment due dates

Quarter	Period	Due date
Q1	1 July to 30 September	28 October
Q2	1 October to 31 December	28 February
Q3	1 January to 31 March	28 April
Q4	1 April to 30 June	28 July

If you lodge through a registered tax or BAS agent, later due dates may apply under their lodgment program. Businesses that report GST monthly may report instalments on their monthly activity statement, due on the 21st of the following month. Eligible annual payers generally pay by 21 October. If a due date falls on a weekend or public holiday, you can lodge and pay on the next business day.

How to pay PAYG instalments: step by step

1. Watch for your notice. The ATO sends an instalment notice or includes the PAYG instalment section on your activity statement.
2. Choose your option if offered both: amount (pay the figure shown) or rate (calculate).
3. If using the rate, total your GST-exclusive business and investment income for the quarter from your invoices and statements, then multiply by the rate on your notice.
4. Lodge the notice or activity statement through online services, your agent or software. If you use the amount option and are not varying, you may only need to pay.
5. Pay by BPAY, card or other ATO payment methods using your payment reference number.
6. Record the payment so you can match it to the credit on your tax return.

Worked example: a sole trader using the rate option

Jess, a freelance copywriter in Brisbane, is registered for GST. Her notice shows an instalment rate of 18% for 2026-27. These figures are illustrative.

Quarter	Invoices issued (incl. GST)	GST-exclusive income	Instalment at 18%	Due
Jul-Sep 2026	$24,200	$22,000	$3,960	28 Oct 2026
Oct-Dec 2026	$16,500	$15,000	$2,700	28 Feb 2027
Jan-Mar 2027	$13,200	$12,000	$2,160	28 Apr 2027
Apr-Jun 2027	$22,000	$20,000	$3,600	28 Jul 2027
Total	$75,900	$69,000	$12,420

Jess applies the rate to the GST-exclusive figure, not the invoice totals. When she lodges her 2026-27 return, her actual tax, after deductions and Medicare levy, comes to $11,900, so the ATO credits all $12,420 and refunds $520 (or applies it to other debts). Had she been on the amount option with a figure based on a much better prior year, she might have varied it in the quiet December quarter. Because Jess's income depends on when she invoices, she also keeps a simple tax savings account; our guide on how much to set aside for taxes explains the habit.

Varying your instalments

You can vary your instalment amount or rate if you expect the current instalments to be more or less than your tax for the year. The varied figure applies for the rest of the income year or until you vary again. Vary through your activity statement or instalment notice before the due date of the quarter you want it to apply to.

Be careful about varying too low. The ATO can charge general interest charge if your varied instalments fall below 85% of the benchmark worked out from your actual tax. Good reasons to vary include losing a major client, a long illness, or a big deductible purchase that will cut your taxable income. Record how you made your estimate.

What to do in your first year as a sole trader

The first profitable year is where most sole traders get caught out. The ATO has no history, so you are not in the instalment system, and your whole year's tax is due after you lodge. Then, because that return shows business income, the ATO enters you into PAYG instalments, and your first quarterly instalment for the following year can land within months of the big bill. It can feel like paying two years of tax at once.

Two ways to soften it:

• Enter voluntarily during your first year so you start prepaying, using the rate option to keep payments in line with income.
• Set aside a fixed share of every invoice the day it is paid. Many sole traders use 25% to 30%, adjusted to their own tax bracket.

If you have a large bill you cannot pay in full, the ATO offers payment plans, but interest generally applies. Talking to a tax agent early is much cheaper than paying general interest charge for months.

PAYG instalments vs PAYG withholding

The names are similar but the systems are different. PAYG withholding is tax a payer deducts from someone else's pay, such as employees' wages, or from contractors who do not quote an ABN. PAYG instalments are prepayments of your own income tax. A sole trader with employees may deal with both on the same activity statement. If your clients ask for your ABN on your invoices, that is to avoid having to withhold tax from your payments at the top rate.

Common mistakes

• Including GST in instalment income. Use the GST-exclusive amount.
• Ignoring the notice because you plan to pay at tax time. Unpaid instalments attract GIC and can lead to penalties for late lodgment.
• Double counting. Instalments are credits, not deductions; do not claim them as a business expense.
• Forgetting super and GST. Instalments cover income tax only. If you employ staff, super guarantee obligations are separate; see Payday Super 2026.
• Not budgeting for the first year. New sole traders can face a full year of tax plus their first instalment in the same few months.

Where PAYG instalments sit with GST and BAS

If you are registered for GST, your business activity statement combines GST and PAYG instalments, and possibly PAYG withholding for employees. Each has its own section. The Australia GST registration guide covers the $75,000 threshold and BAS basics, and the Australian tax invoice requirements show what your invoices need. If you pay contractors in certain industries, you may also have a Taxable Payments Annual Report to lodge.

Accurate instalments start with accurate income records. Issue every invoice with your ABN, a clear GST line and a unique number using our free invoice generator, with no sign-up needed and a PDF download in seconds.