What Are PAYG Instalments and How Do You Calculate Them? The 2026 Guide
You lodge your tax return. A few months later, the ATO sends you a notice asking you to start making quarterly tax payments.
This is called PAYG instalments. Most business owners find it confusing the first time it happens.
Here is exactly what it means and what to do.
What Are PAYG Instalments?
PAYG instalments are regular prepayments of the expected tax on your business and investment income.
Instead of paying all your income tax in one hit after you lodge, you pay it in smaller amounts throughout the year.
Think of it like income tax in advance. When you lodge your return, the instalments you have paid are credited against what you actually owe.
Why Does the ATO Put You Into the System?
The ATO automatically enters you into PAYG instalments once your tax liability reaches a certain level.
The ATO bases your instalments on your most recent tax return. If you owed more than $1,000 in tax after lodging, you are likely to be entered into the system.
You will receive a letter telling you. From that point, instalment amounts appear on your quarterly BAS or on a separate instalment notice.
Two Ways to Pay
You can pay an instalment amount the ATO calculates for you or calculate your payment using an instalment rate the ATO gives you.
Option 1 — Instalment amount. The ATO tells you a fixed dollar amount to pay each quarter. You do not need to calculate anything. This is the simpler option.
Option 2 — Instalment rate. The ATO gives you a percentage. You multiply it by your business income each quarter. This option suits businesses with variable income.
You can switch between the two options when you lodge your BAS.
How the ATO Calculates Your Amount
The ATO calculates your instalment amount using information from your most recent tax return and adjusts it to reflect likely growth in your income. The GDP adjustment for the 2025–26 income year is 4%.
In plain terms: they take last year’s tax bill, add 4%, and divide by four to get your quarterly amount.
If your income this year is similar to last year, this amount will be roughly right.
If your income has dropped significantly, you may be overpaying. That is when you vary the instalment.
What Is Instalment Income?
Instalment income is your gross business and investment income, excluding GST. It is not your profit. It is your total revenue before expenses.
This matters because many business owners confuse their instalment income with their taxable income. They are different. You calculate the instalment on gross income your accountant handles the deductions at year end.
Can You Change the Amount?
Yes. You can vary your PAYG instalment if the ATO’s amount does not match your current year income.
If your income fluctuates, you can vary your PAYG instalments through your BAS to stay accurate and avoid overpaying or underpaying. You vary the amount on your BAS each quarter. You do not need ATO approval.
But be careful. If you underestimate by more than 15%, interest charges may apply. Do not vary downward unless you are confident your income has genuinely dropped.
When Are Payments Due?
Due dates for PAYG instalments are generally 28 days after the end of each quarter. The four payment dates are:
- 28 October — July to September quarter
- 28 February — October to December quarter
- 28 April — January to March quarter
- 28 July — April to June quarter
Missing these dates means the ATO charges interest. Pay on time even if you plan to vary the amount at year end.
What Happens at Tax Time?
When you lodge your annual income tax return, the ATO calculates your actual tax liability for the year.
Your four quarterly instalments are credited against this amount.
If you overpaid, you get a refund. If you underpaid, you pay the difference plus potentially some interest if the shortfall was more than 15%.
This is why varying your instalments when your income drops matters. Overpaying ties up your cash for up to 12 months with the ATO.
PAYG Instalments vs PAYG Withholding: What Is the Difference?
These two things sound similar but are completely different.
PAYG withholding is the tax your business withholds from employee wages and sends to the ATO each pay run. It is your employees’ income tax not yours.
PAYG instalments are advance payments of your own income tax as a business owner. They appear on your BAS but are separate from the GST and withholding sections.
Both appear on your BAS. Both have separate labels. Getting them confused is one of the most common BAS errors.
Do Sole Traders Pay PAYG Instalments?
Yes. Sole traders pay income tax on their business profits at individual rates.
Once the ATO enters a sole trader into the instalment system, they pay quarterly. The amount is based on the previous year’s tax return.
Sole traders who are just starting out may not be in the system yet. Once you lodge your first tax return and owe more than $1,000, expect to start receiving instalment notices.
Frequently Asked Questions
What if I ignore the PAYG instalment notice? The ATO will chase it. Late payment attracts the General Interest Charge, which is currently over 10% per annum. It is not deductible.
Can I opt out of PAYG instalments? Generally, no, once the ATO enters you. But if your income drops below the threshold, the ATO will remove you from the system after you lodge your return.
Does a company pay PAYG instalments? Yes. Companies pay PAYG instalments on their business income, separate from the PAYG withholding they manage for employees.
Where do I pay? Through your BAS, via myGovID, or directly through your accounting software.
Keep Your Cash Flow Steady All Year
Unexpected tax bills wreck cash flow. PAYG instalments are designed to prevent that.
At Edulink Payroll Services, we help businesses across Campbelltown and greater Sydney manage payroll, BAS, and compliance so there are no surprises at tax time.
Edulink Payroll Services charges $750 per year, per employee fixed pricing, no surprises.
Have more employees? Call us for a discounted rate.
📞 Call us today: 04 044 71 816
Edulink Payroll Services | Campbelltown & Greater Sydney | Call 04 044 71 816
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