What are PAYG instalments?
PAYG instalments are prepayments of income tax during the financial year. The ATO estimates how much tax you owe based on your latest assessed income and asks for quarterly payments (or sometimes annual, depending on your circumstances).
They are separate from GST on your BAS. A single BAS can include both GST and PAYG income tax instalments, which is why many sole traders think of “quarterly BAS” as their main tax rhythm.
Who gets PAYG instalment notices?
The ATO usually enters you into the PAYG instalment system after you lodge a tax return showing tax payable over a certain amount (commonly when tax on business income exceeds around $1,000). New sole traders might not pay instalments in year one but should still set money aside.
Our tax calculator shows an estimated quarterly tax figure you can use for budgeting even before the ATO sends formal notices.
How amounts are calculated
The ATO may calculate instalments using:
- Instalment amount — A fixed dollar amount per quarter (ATO provides the figure).
- Instalment rate — You multiply the rate by your actual quarterly business income (variation if income drops).
If your income falls sharply, you can vary a quarter down — but underpaying without grounds can attract interest (General Interest Charge).
Budgeting rule of thumb
Many freelancers set aside 25–35% of each invoice (after expenses) for income tax and Medicare, depending on profit level. Higher earners face higher marginal rates, so a flat 25% may be too low above roughly $135,000 taxable income in 2025–26.
Combine PAYG with:
- Super contributions (tax-deductible within caps)
- GST collected (if registered) — held in a separate account
- Business expenses that reduce taxable profit
PAYG vs tax return balance
Instalments are credits toward your annual assessment. If you paid too much across the year, you receive a refund after lodging. If too little, you pay the difference (plus possible interest). Keeping profit steady quarter to quarter makes estimates more accurate.
First year as a sole trader
With no prior-year assessment, you might not receive PAYG instalments immediately. That does not mean tax is optional — you will likely pay a large lump sum when your first return is lodged unless you voluntarily paid in advance. Proactive quarterly transfers to a “tax savings” account reduce stress.
See your estimated quarterly tax
Live calculator with 2025–26 brackets, Medicare levy, and PAYG-style quarterly estimate.
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