PAYG instalments: How they work, due dates and rates

Getting a PAYG instalment notice can feel like the Australian Taxation Office (ATO) is asking you to pay tax you haven't finished earning yet. PAYG is not a second tax bill. It's a prepayment toward the income tax you're expected to owe at the end of the financial year.

This guide explains what PAYG instalments are, who's required to pay them, and how the ATO calculates the amounts. We also explore when each payment is due, and what your options are if your income changes or you want to exit the system.

Tax obligations vary depending on your individual circumstances. Speak to a registered tax agent if you're unsure how PAYG instalments apply to you. This article provides general information only and is not a substitute for professional tax advice.

What are PAYG instalments?

PAYG instalments are prepayments of income tax collected by the ATO throughout the financial year on business and investment income.

PAYG instalments are not a separate tax on top of income tax. They're the mechanism the ATO uses to collect the income tax you'd otherwise owe in a single lump sum when you lodge your return. If you pay the right amount during the year, your tax return either breaks even or generates a small refund or top-up payment.

What counts as instalment income? It's your gross business and investment income for the period, excluding GST and any capital gains. That includes:

• Gross business income from sole trader or company operations
  
• Rental income from investment properties
  
• Interest and dividends
  
• Your share of partnership or trust income
  
• Foreign income where applicable
  

Wages and salary income are not instalment income that's handled separately through PAYG withholding, which your employer manages on your behalf.

Why do I have to pay PAYG instalments?

The ATO doesn't want to wait until June 30 to start collecting tax on income you've already earned. For employees, this isn't an issue. Employers withhold tax from each pay cheque and send it to the ATO throughout the year. By the time an employee lodges their return, most of their tax liability is already covered.

Self-employed people, business owners, and investors don't have that automatic withholding. Without PAYG instalments, someone running a profitable sole trader business could earn income across an entire financial year. They don’t pay any tax until October the following year when their return is assessed more than 16 months after the first dollar was earned.

That creates a large, unpredictable lump-sum payment and a cash flow problem for both the taxpayer and the ATO.

Who pays PAYG instalments?

If you are an individual (including a sole trader) or trust, you'll automatically enter the PAYG instalments system if you have all of the following:

• Instalment income from your latest tax return of AUD $4,000 or more
  
• Tax payable on your latest notice of assessment of AUD $1,000 or more
  
• An estimated notional tax of at least AUD $500
  

A company or super fund will automatically enter the PAYG instalments system if it has instalment income from its latest tax return of AUD $2 million or more.

The types of taxpayers who commonly enter the system:

• Sole traders earning business income above the threshold
  
• Freelancers and contractors paid without tax withheld (i.e., not on payroll)
  
• Property investors with rental income
  
• Shareholders receiving dividends or other investment returns
  
• Companies and trusts above the relevant income thresholds
  
• New business owners who voluntarily enter to avoid a large year-end bill
  

Voluntary entry is worth considering if you're new to business and expect to meet the thresholds during the current year. Prepaying your tax through PAYG instalments will help you smooth out your cash flow and avoid a large tax bill when you lodge your tax return.

Waiting to be automatically enrolled means your first instalment period may not start until the following financial year leaving a larger lump sum on lodgement.

PAYG instalments vs PAYG withholding

These two systems have similar names and create confusion, particularly for Australians who are both employed and self-employed.

[Table:1]

The practical confusion arises for contractor and freelancer invoices. If a client withholds tax from your invoice under PAYG withholding rules, that withheld amount is credited against your tax liability at return time just like instalment payments are.

How do PAYG instalments work?

The overall process moves in four stages:

1. Entry into the system

The ATO reviews your lodged tax return. If your instalment income and tax payable cross the entry thresholds, it enrolls you automatically and notifies you by letter. You can also enter voluntarily through ATO online services.

2. Quarterly (or other) payments

Each quarter, the ATO issues either a BAS (Business Activity Statement) or an instalment notice. You calculate or confirm the instalment amount, report it, and pay by the due date.

3. Credits accumulate

Every instalment you pay is held as a credit against your income tax liability for that financial year. You're not paying extra, you're prepaying.

4. Tax return reconciliation

When you lodge your annual tax return, your total PAYG instalments for the year are offset against your assessed tax liability:

• If your instalments exceed your tax liability → you receive a refund
  
• If your instalments fall short of your tax liability → you pay the difference
  
• If they match exactly → nothing further is owed
  

A simple example:

[Table:2]

This is a simplified illustration. Actual tax calculations depend on deductions, offsets, and other factors specific to each taxpayer's circumstances.

How are PAYG instalments calculated?

The ATO gives most taxpayers a choice between two methods. The method you choose at the first quarter applies for the rest of the income year.

1. Instalment amount method

The ATO calculates your instalment amount from your most recent tax return and adjusts it each year by the GDP adjustment factor. For 2026–27, the GDP adjustment factor is 5%. For 2025–26, it was 4%.

You simply pay the amount shown on your activity statement or instalment notice. No calculation required.

Limitation: if your income drops significantly from the previous year, you'll be paying an amount based on higher prior-year income and overpaying until you vary or lodge your return.

2. Instalment rate method

The ATO provides you with an instalment rate, a percentage derived from your most recent tax return. You multiply this rate by your actual quarterly instalment income to arrive at the payment.

Formula: Quarterly payment = instalment rate × actual quarterly instalment income

This method involves more calculation each quarter but reflects your current-year income more accurately. If your income is volatile or trending differently from last year, this method often produces a more appropriate payment.

[Table:3]

Large businesses with instalment income of AUD $20 million or more pay monthly rather than quarterly.

When are PAYG instalments due?

Due dates for PAYG instalments are generally 28 days after the end of each quarter. For the 2026–27 financial year, the quarterly due dates are:

[Table:4]

For the 2025–26 financial year (Q4 outstanding):

[Table:5]

Can you pay PAYG instalments annually?

Some taxpayers may be eligible to pay PAYG instalments annually rather than quarterly. This can apply where the most recent estimated tax amount notified by the Commissioner is less than AUD $8,000.

If you're eligible, the ATO will tell you the applicable reporting and payment arrangement. For example, annual PAYG instalment notices (Form N) for 2025–26 have a 21 October 2026 due date.

A few practical notes on timing:

• If you lodge your BAS electronically through a registered tax agent, an extended due date may apply. Check your specific notice the due date is shown there.
  
• If you pay GST monthly, your PAYG instalment due date is the 21st of each month, not the 28th. You're not eligible for the two-week electronic lodgement extension.
  
• Make sure you lodge all activity statements and pay all instalments before you lodge your tax return. The instalments paid throughout the year are then taken into account in your tax assessment.
  

How do you pay PAYG instalments?

Payment is made either through a BAS or an instalment notice, depending on your reporting setup.

If you're GST-registered, your PAYG instalment obligations are typically included in your BAS the same form you use to report and pay GST. You lodge the BAS and pay any amounts owing together.

If you're not GST-registered, the ATO sends you an instalment notice (also called a remittance advice). If you receive an instalment notice and pay the instalment amount shown, you don't need to lodge it, just pay the instalment amount by the due date. You only need to lodge if you're varying the amount.

Payment channels accepted by the ATO include:

• ATO online services via myGov (individuals and sole traders)
  
• Online services for business
  
• BPAY using the payment reference number (PRN) on your notice
  
• Direct debit
  
• Electronic funds transfer (EFT)
  

Keep your PRN (Payment Reference Number) from your activity statement or instalment notice. Without it, your payment may not be correctly allocated.

PAYG instalment labels on your BAS

When you report PAYG instalments through a BAS, you'll see specific labels for the instalment calculation. T7 is used when reporting an instalment amount, while T8 is used when reporting the instalment rate. If you're using the rate method, T9 is used for the resulting instalment amount calculated from your instalment income and the rate.

For example, if your BAS shows an instalment rate of 3% at T8 and you have AUD $40,000 of instalment income for the quarter, the resulting PAYG instalment would be AUD $1,200, reported at T9.

Can you vary PAYG instalments?

Yes and in some circumstances, varying is the right thing to do. The PAYG system uses prior-year income as the baseline, which works well when income is stable but creates mismatches when your business has changed.

You might consider varying if:

• Your income has dropped significantly compared to last year (and the ATO's amount method is overstating what you'll owe)
  
• Your business has grown and you want to pay more throughout the year to avoid a large bill on lodgement
  
• You had an unusually high-income year due to a one-off event (an asset sale, a large project) that won't recur
  
• You've taken on significant deductible expenses that weren't present in the prior year
  

Accuracy matters: if your varied instalments come to less than 85% of your actual tax on instalment income, the ATO can charge interest on the difference and that interest is no longer deductible from 1 July 2025.

How to cancel PAYG instalments

"Cancel" here means exiting the PAYG instalments system entirely, which is different from varying a single quarter's payment down. You may be eligible to exit if you're no longer earning business or investment income above the entry thresholds.

The ATO will automatically remove you from PAYG instalments if you: are eligible to claim the senior and pensioners tax offset in your tax return; report business and investment income of less than AUD $4,000 (for residents) in your tax return; have a tax debt of less than AUD $1,000 after adjustments for PAYG instalments and voluntary payments in your tax assessment.

If you want to exit before the automatic removal occurs:

You can make a request to exit PAYG instalments using your myGov account linked to ATO Online services. For individuals and sole traders:

1. Sign in to myGov
   
2. select “Tax”
   
3. Click on “Manage”
   
4. Click on ”Tax registrations”
   
5. Click “Cancel”.
   

This option will only be available when you become eligible to exit PAYG instalments.

Founder’s note: if you lodge a tax return with income or tax above the entry thresholds after exiting, the ATO will contact you about re-entering PAYG instalments. Exiting in a low-income year and then having a strong year can result in being re-enrolled, potentially with a large lump-sum liability at return time while you wait for the instalments to resume.

Common PAYG instalment mistakes

1. Treating instalments as a second tax

Every dollar you pay as a PAYG instalment is a dollar credited against your tax return. The total cost is your actual tax liability instalments just change when you pay it.

2. Confusing PAYG instalments with PAYG withholding

If your client withholds tax from your invoice, that's PAYG withholding it's their obligation. Your PAYG instalment is separate and applies to your business income. Both credits count at return time.

3. Missing a due date

The ATO charges GIC from the day after the due date, and it's no longer deductible. Set calendar reminders for all four quarterly due dates at the start of each financial year.

4. Assuming last year's income still reflects this year

The amount method is based on prior-year returns adjusted by the GDP factor. In a high-growth year, this understates your liability. In a downturn, it overstates it. Neither extreme is accurate without a variation.

5. Varying too aggressively without a realistic income estimate

Varying down to zero or near-zero because cash is tight may feel helpful in the short term. But if your actual income ends up triggering a liability significantly above your varied instalments, the GIC shortfall now non-deductible makes it an expensive choice.

6. Ignoring ATO notices

Entry into the PAYG system is notified by letter. Founders who miss this notice can find themselves with overdue instalments they weren't aware of. Make sure the ATO has your current address and check your myGov account regularly.

Keep tax obligations visible in your business cash flow

PAYG instalments are a recurring obligation with predictable due dates. The mechanics are manageable; the challenge is having the cash available when each quarter rolls around, particularly when business income is variable.

One practical approach is separating tax provisions from your operating cash as you go. When income comes in, setting aside a proportion for the next instalment means the quarterly payment doesn't have to compete with payroll, supplier invoices, or operating costs when the ATO notice arrives.

Aspire's business account helps founders keep their business finances organised and visible separate from personal funds, with real-time spending visibility and the ability to manage multiple accounts and currencies in one place.

For founders earning revenue across different markets, having clear sight of what's available in your business account makes planning for recurring obligations including quarterly tax instalments considerably more straightforward.

What's changing: Dynamic PAYG instalments from 1 July 2027

The Australian Government has announced changes to PAYG instalments that are intended to make payments more closely reflect a business's current income. The final rules may change before they take effect.

From 1 July 2027, taxpayers will be able to opt in to monthly reporting using a dynamic calculation method. The calculation will be approved by the ATO and embedded directly into accounting software, including platforms such as Xero and MYOB, allowing instalments to be calculated based on more up-to-date income information.

Under the proposed approach:

• Opt-in monthly reporting will be available from 1 July 2027.
  
• An ATO-approved dynamic calculation will be built into participating accounting software, including Xero and MYOB.
  
• GIC will not apply where the dynamic calculation method is used as intended and the relevant requirements are met.
  
• Monthly reporting will become mandatory for non-compliant taxpayers, subject to the final rules.
  

The intended shift is from estimating tax obligations based largely on historical information toward a system that can respond more dynamically to changes in business income. This could make PAYG instalments more closely aligned with businesses.

Important: These changes have been announced but are not yet law. The final legislation, eligibility requirements and implementation details should be confirmed with the ATO before relying on the proposed rules.

Frequently asked questions

What are PAYG instalments?

PAYG instalments are advance payments toward income tax on business and investment income, collected by the ATO throughout the financial year. They're not a separate tax, they're a prepayment of the income tax you'd otherwise pay in a lump sum when you lodge your annual return.

Why do I have to pay PAYG instalments?

The ATO uses PAYG instalments to collect income tax progressively throughout the year rather than waiting until the return is lodged. For business owners and investors whose income is not subject to employer withholding, instalments spread the tax obligation across the year and reduce the risk of a large unexpected bill at lodgement.

Who pays PAYG instalments?

Individuals (including sole traders) and trusts automatically enter the system when their instalment income from the latest return is AUD 4,000 or more, their tax payable was AUD 1,000 or more, and their estimated notional tax is at least AUD 500.

When are PAYG instalments due?

Quarterly instalments are generally due 28 days after the end of each quarter. For 2026–27: 28 October 2026, 28 February 2027, 28 April 2027, and 28 July 2027. Annual instalments for 2025–26 are due 21 October 2026. Confirm your specific due date on your activity statement or instalment notice.

How are PAYG instalments calculated?

The ATO provides either an instalment amount (based on your prior-year tax return, adjusted by the GDP factor 4% for 2025–26, 5% for 2026–27) or an instalment rate (a percentage you multiply by your quarterly instalment income). You can choose which method to use in the first quarter of the year.