Guide

How to calculate and report PAYG instalments for your business

Learn what PAYG instalments are, how to calculate them, and when they're due so you can stay on top of your tax.

Chesney McDonald–Small business & finance writer/editor. Read Chesney's full bio

Published Monday 24 August 2026

Key takeaways

PAYG instalments are regular prepayments of your expected income tax on business and investment income, so you don't face a large bill at tax time.
You'll enter the system when your instalment income is $4,000 or more and your estimated tax payable is $1,000 or more.
You can choose between two calculation methods: a fixed amount set by the ATO (Option 1) or your instalment income multiplied by a rate the ATO provides (Option 2).
Quarterly instalments are due 28 days after each quarter ends, and you report them on your BAS or instalment notice.

What are PAYG instalments?

Pay as you go (PAYG) instalments are regular prepayments you make towards your expected income tax. Instead of waiting until after you lodge your tax return and receiving one large tax bill, you spread the cost across the year in smaller, more manageable amounts.

The system covers tax on income you earn from your business, rental properties, interest and dividends. It's managed by the Australian Taxation Office (ATO), and the idea is straightforward: if you're earning income that doesn't have tax withheld from it automatically, the ATO wants you to pay tax on it progressively throughout the year.

Think of it as a way to stay ahead of your tax obligations. Rather than scrambling for a lump sum when your tax return is due, you chip away at it quarter by quarter. It's better for your cash flow, and it means fewer surprises.

Who needs to pay PAYG instalments?

The ATO will enter you into the PAYG instalment system automatically once you lodge a tax return that meets certain thresholds. You don't need to sign up yourself.

You'll be required to pay PAYG instalments if all three of the following apply:

Your instalment income (business and investment income) is $4,000 or more.
Your estimated tax payable on that income is $1,000 or more.
Your estimated notional tax is $500 or more.

Once you meet these thresholds, the ATO sends you a letter telling you that you've been entered into the system. From that point, you'll start receiving instalment notices or see the relevant labels on your business activity statement (BAS).

The system applies to individuals, companies, trusts and self-managed super funds. If you're a sole trader, freelancer or contractor earning above those thresholds, it's likely you'll be included. You can also enter the system voluntarily if you're a new business expecting to turn a profit and want to stay ahead of your tax.

PAYG instalments vs PAYG withholding

These two systems sound similar, but they cover different things. It's one of the most common points of confusion for small business owners, so it's worth getting clear on the difference.

PAYG instalments: These are payments you make on your own business and investment income. They're your responsibility as a business owner, sole trader or investor.
PAYG withholding: This is the tax you deduct from your employees' wages and send to the ATO on their behalf. If you don't have employees, PAYG withholding won't apply to you.

A business can be in both systems at the same time. For example, if you're a sole trader who also employs a part-time assistant, you'd pay PAYG instalments on your own income and withhold tax from your employee's pay. Each system has its own reporting requirements and due dates.

Calculating your PAYG instalments

The ATO gives you two options for calculating how much to pay each period. You can choose whichever suits your situation, and you can switch between them.

Option 1: Pay a set instalment amount

With Option 1, the ATO does the maths for you. They calculate a fixed annual instalment amount based on the information in your most recent tax return, adjusted by a GDP adjustment factor to account for likely income growth.You simply:

Divide that annual amount by the number of instalments in the year (usually four for quarterly payers) and pay the same figure each period.

For example, if the ATO calculates your annual instalment as $8,000 based on your last tax return (adjusted by the GDP factor), your quarterly instalment is $8,000 divided by four, which equals $2,000 per quarter.This option works well if your income is fairly stable and predictable from year to year.

Option 2: Calculate using the instalment rate

With Option 2, you calculate the amount yourself using a rate the ATO provides. The formula is:

Multiply your actual instalment income for the period by the ATO-provided instalment rate.

The ATO works out your instalment rate using this formula: (estimated notional tax divided by instalment income) multiplied by 100. This gives a percentage that reflects the proportion of your income that goes towards tax.

For example, if your quarterly instalment income is $25,000 and the ATO has provided an instalment rate of 8%, your calculation is $25,000 multiplied by 8%, which gives you an instalment of $2,000 for that quarter.This option is a better fit if your income fluctuates throughout the year, because the amount you pay adjusts with your actual earnings.

The GDP adjustment factor

The ATO applies a GDP adjustment factor to your instalment amount each year. This factor accounts for expected growth in the economy and adjusts your instalments upward slightly.

For the 2025-26 financial year, the GDP adjustment factor is 4%. From 1 July 2026, the factor increases to 5% for the 2026-27 financial year. This means your instalment amount under Option 1 may be slightly higher than your previous year's tax alone would suggest.

The adjustment only applies to the ATO's pre-calculated amount under Option 1. If you're using Option 2, you're already calculating based on your actual income, so the GDP factor doesn't change your instalment directly.

PAYG instalment due dates

Your due dates depend on whether you pay quarterly, monthly or annually. Most small businesses and sole traders pay quarterly.

Here are the quarterly due dates, which fall 28 days after each quarter ends:

July to September quarter: 28 October
October to December quarter: 28 February
January to March quarter: 28 April
April to June quarter: 28 July

If you pay monthly, your instalment is due on the 21st of the following month. Eligible small businesses that pay annually have a due date of 21 October.

When a due date falls on a weekend or public holiday, you have until the next business day to lodge and pay. It's a good idea to mark these dates in your calendar so you don't get caught out.

Lodging and paying PAYG instalments

How you report your instalments depends on whether you're registered for goods and services tax (GST). If you are, you'll report your PAYG instalments on your BAS alongside your GST figures. If you're not registered for GST, the ATO will send you a separate instalment activity statement (IAS).

You can lodge through a few different channels:

ATO Online Services via your myGov account
Through a registered tax agent or BAS agent
Using compatible accounting software

When it comes to paying, you have several options including BPAY, direct debit, credit card and electronic funds transfer (EFT). Your payment reference number is on your BAS or instalment notice, and you'll need it to make sure your payment is allocated correctly.

Varying your PAYG instalments

If your income changes significantly during the year, you don't have to stick with the amount or rate the ATO has set. You can vary your instalment to better reflect your actual circumstances.

You might want to vary your instalment if:

Your business income has dropped and you're overpaying.
You've had a strong period and want to increase payments to avoid a bill later.
Your circumstances have changed, for example you've taken on a large new contract or lost a major client.

To vary, you update the relevant field on your BAS or instalment notice.

For Option 1: You enter a new instalment amount.
For Option 2: You enter a new instalment rate.

You can do this through ATO Online Services or with the help of your tax agent.

Be careful about varying too low. If the instalments you've paid end up being less than 85% of your actual tax liability for the year, the ATO may charge a general interest charge (GIC) on the shortfall. It's better to estimate conservatively.

Ways to stop paying PAYG instalments

There are a few ways to exit the PAYG instalment system. In most cases, it happens automatically.

If your latest tax assessment shows your income and tax payable have dropped below the entry thresholds, the ATO will remove you from the system. You don't need to do anything.
You can also choose to exit voluntarily if your instalment income for the current year is likely to be less than $2,000. To do this, notify the ATO through your BAS or instalment notice by selecting the option to stop paying.
If you've overpaid your instalments during the year, the excess amount will show up as a credit when you lodge your tax return. You'll either receive a refund or have it applied against other tax debts.

Common PAYG instalment mistakes to avoid

Staying on top of PAYG instalments is straightforward once you understand the system, but there are a few common slip-ups worth knowing about.

Confusing PAYG instalments with PAYG withholding: They're separate systems. Instalments are about your own income tax; withholding is about your employees' tax.
Forgetting to vary when income drops: If your business has a slow period and you don't adjust your instalment, you could overpay and tie up cash you need.
Varying too low: Going the other way is risky too. If you underpay by more than 15%, you could face general interest charges from the ATO.
Missing due dates: Late payments can attract penalties and interest. Set reminders well before each due date.
Not claiming credits at tax time: Your PAYG instalments are credits against your annual tax bill. Make sure your tax agent or return includes them, or you might pay more than you owe.

Stay on top of PAYG instalments with Xero

Managing PAYG instalments is much easier when you can see your business income in real time. Xero gives you a clear view of your earnings throughout the year, so you can help estimate your instalments with confidence and help avoid surprises at tax time.

With Xero, you can track your income and expenses in real time and prepare your BAS when it's due. Keeping your records organised means you'll have everything the ATO needs when reporting time comes around. If your income changes, you'll spot it early enough to vary your instalment before the due date.

Xero also works with your tax agent or bookkeeper, so everyone's on the same page when it comes to your obligations.

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FAQs on PAYG instalments

Here are some common questions about PAYG instalments and how they work.

Why is the ATO asking for payment for PAYG instalments?

The ATO entered you into the system because your most recent tax return showed instalment income of $4,000 or more and estimated tax payable of $1,000 or more. It's their way of helping you spread your tax payments across the year.

Can you opt out of PAYG instalments?

If you choose to exit voluntarily, the ATO may still re-enter you into the system the following year if your next tax return shows you meet the thresholds again. Exiting doesn't prevent future re-entry.

What happens if you miss a PAYG instalment payment?

The ATO may charge a failure-to-lodge penalty and general interest on the outstanding amount. If you realise you've missed a due date, lodge and pay as soon as possible to minimise any charges.

Can you get a refund if you overpay your PAYG instalments?

Yes. Any excess PAYG instalment payments show up as a credit when you lodge your annual tax return. The ATO will either refund the amount or apply it to any other tax debts you have.

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