The short answer
PAYG instalments are regular prepayments of the tax on your business and investment income. Here's who pays them, how the amount is worked out, the due dates, and how to vary them safely.
In short: PAYG instalments are regular prepayments of the tax on your business and investment income, paid during the year so you don't face one big bill when you lodge your return. The ATO puts you into the system automatically once your latest return shows enough business or investment income, and most people then pay quarterly with their BAS or an instalment notice.
Many business owners meet PAYG instalments in their second year. The first year's tax bill arrives, and with it a notice asking for the first instalment towards next year. It feels like paying tax twice. It isn't, but it does hit cash flow if you haven't planned for it.
Who has to pay PAYG instalments?
The ATO enters you automatically after you lodge a return. The rules depend on your structure.
If you're an individual or sole trader, or a trust: you're entered when your latest return shows all three of these: instalment income of $4,000 or more, tax payable of $1,000 or more on your latest assessment, and estimated (notional) tax of $500 or more.
If you're a company or super fund: you're entered if your latest return shows instalment income of $2 million or more, or estimated tax of $500 or more, or if you head a consolidated group.
Instalment income is your gross business and investment income for the period, excluding GST: sales, interest, rent, dividends. It is not your profit, and it doesn't include capital gains.
New businesses can also join voluntarily, which is worth considering if you'd rather put tax aside as you go.
How does the ATO work out how much I pay?
You'll be given two options.
Option 1: pay the instalment amount. The ATO works out a set amount from your last return, uplifted by a GDP adjustment factor. For 2026–27 that factor is 5%. You pay a quarter of the annual figure each quarter. It's simple and doesn't need any calculation on your part.
Option 2: use the instalment rate. Each quarter, you multiply your actual instalment income for that quarter by a rate the ATO gives you. If your income drops, so do your instalments. This suits businesses with lumpy or seasonal income.
For example, say your rate is 12% and your business turned over $60,000 (excluding GST) in the July–September quarter. Your instalment is $60,000 × 12% = $7,200.
When are PAYG instalments due?
If you pay quarterly, the usual due dates are:
July–September: due 28 October
October–December: due 28 February
January–March: due 28 April
April–June: due 28 July
Some small taxpayers can pay one annual instalment instead, due 21 October. Ask your accountant whether you qualify. If a registered tax agent lodges for you, you may have extra time on some quarters.
Can I change my PAYG instalments?
Yes. You can vary the amount or rate on your BAS or instalment notice, through ATO online services, or through your tax agent. This makes sense if your income has fallen, you've had a big one-off expense, or you've changed structure.
Here's the catch: if your varied instalments end up below 85% of the tax you actually owe for the year, the ATO can charge the general interest charge on the shortfall. So vary when the numbers support it, not just to ease a tight month.
What happens at tax time?
Every instalment you pay during the year is credited against your final tax bill. If you paid more than you owe, you get the difference back. If you paid less, you pay the balance.
That's why we recommend treating instalments as part of your tax plan, not a surprise. Put aside a set percentage of every sale in a separate tax account, and the quarterly payment is never a problem.
Common mistakes we see
Reporting profit instead of gross income when using the rate option. Instalment income is your sales, before expenses.
Ignoring the first notice because the year's tax bill was just paid. Unpaid instalments build up and still have to be paid.
Varying to zero in a slow quarter and then having a strong year. The 85% rule can lead to interest charges.
Not changing structure in time. If your profit has grown a lot, it may be worth talking about whether your structure still suits you, before the next instalment cycle.
Frequently asked questions
Are PAYG instalments the same as PAYG withholding?
No. PAYG withholding is tax you take out of your employees' wages and pay to the ATO. PAYG instalments are prepayments of your own tax on business and investment income.
Do I have to pay PAYG instalments in my first year of business?
Usually not. The ATO uses your latest return, so most owners are entered after their first year's return is lodged. You can join voluntarily earlier.
What happens if I pay too much in PAYG instalments?
The excess is credited when you lodge your return, so you get it back as a refund or it reduces what you owe.
Can I stop paying PAYG instalments?
The ATO removes individuals whose latest return shows instalment income under $4,000, a tax debt under $1,000 after instalments, or an instalment rate of 0%. Otherwise you can vary your instalments but not opt out.
Key takeaways
PAYG instalments are prepayments of the tax on your business and investment income, not an extra tax.
You choose between a set amount (uplifted 5% for 2026–27) and a rate applied to your actual income.
Quarterly due dates are 28 October, 28 February, 28 April and 28 July.
Vary carefully: below 85% of your actual tax can attract interest.
PAYG instalments are much easier when they're built into a tax plan. If you'd like help setting that up, talk to Sam about your situation.
Related: Five common business tax mistakes to avoid · The different types of business taxes in Australia · Income tax calculator
Last updated: 2 November 2026.
General information only, based on the rules at the date above. It does not take into account your circumstances, so speak to your accountant before acting.
Sam is as passionate about people as he is about numbers. A Chartered Accountant (CA) member and Xero specialist, he loves building long-term client relationships and providing holistic advice that helps people achieve both their business and personal goals. Problem-solving is his thing - which is handy in an industry that never stops changing.
