PAYG Instalments Explained

10 February, 2026 · 5 min read

Author

If you run a small business, work as a sole trader, or operate through a company, you might receive a letter from the ATO asking you to pay PAYG instalments.

Many business owners are caught off guard when this letter arrives. You might wonder:

“Why do I suddenly owe the ATO money?”
“Did I do something wrong?”
“How am I going to pay for this?”

This unexpected payable can strain your cash flow if you’re not prepared.

The good news? PAYG instalments are not a punishment — they’re often a sign that your business is growing. They’re designed to help you avoid a much larger tax bill later by spreading your payments across the year instead of paying everything at once.

In this guide, we’ll break down what PAYG instalments are, why they happen, and how to stay in control of your finances.

Quick Summary

PAYG instalments are advance payments on your income tax
Paying them is a legal obligation once the ATO issues an instalment notice
What you pay is credited toward your final tax outcome
The ATO usually enrols you automatically once your income reaches certain levels
You can adjust the amount, but underpaying may lead to interest or penalties

Extra help: use ATO’s PAYG instalment calculator to estimate your instalment amount.

What are PAYG instalments?

PAYG (Pay As You Go) instalments are regular payments you make during the year toward your expected income tax. Instead of paying one large tax bill at the end of the year, instalments spread the cost across the year, helping you manage cash flow.

Not every business has to pay PAYG instalments. The ATO usually places you in the system automatically if your income or last year’s tax payable meets certain thresholds.

Once the ATO issues an instalment notice, paying the amount by the due date is a legal requirement.

Even if you pay instalments, you still must lodge an annual tax return. Any instalments you’ve paid are credited toward your total tax, so you either pay the remaining balance or receive a refund.

When the ATO adds you to PAYG instalments

After you lodge your tax return, the ATO reviews the information you’ve reported to determine whether you need to start paying PAYG instalments. One of the main things they consider is your instalment income, essentially your gross business and investment income. You can find the full list of what counts as instalment income on the ATO website.

For individuals or sole traders:

You will automatically enter the PAYG instalments system if you have all of the following:

Instalment income from your latest tax return of $4,000 or more
Tax payable on your latest notice of assessment of $1,000 or more
Estimated (notional) tax of $500 or more

For companies:

You’ll automatically enter the PAYG instalments system if any of the following apply:

Instalment income from latest tax return of $2 million or more
Estimated (notional) tax of $500 or more
The company is the head of a consolidated group

When you’re entered into the system, the ATO will notify you – usually through your myGov inbox, Online Services for business (i.e. ATO business portal), or by letter – and tell you how often to pay and how to calculate your instalments.

Want to see a sample of PAYG instalment notice? Click here.

How often do you pay?

Most small businesses pay quarterly, but some eligible taxpayers can pay twice a year or annually, while very large businesses (with income over $20 million) usually pay monthly.

Standard due dates for quarterly payers:

Sep Quarter - 1 July to 30 September: Due date: 28 October

Dec Quarter - 1 October to 31 December: Due date: 28 February

Mar Quarter - 1 January to 31 March: Due date: 28 April

Jun Quarter - 1 April to 30 June: Due date: 28 July

Make sure you pay all your instalments before you lodge your tax return. The instalments you pay throughout the year will then be taken into account in your tax assessment.

If you are already paying a quarterly BAS, your PAYG instalment will be added to your GST and other liabilities on the same activity statement, so you can pay everything in one go by the due date.

Want to know more about PAYG instalment payment cycles? Check out the ATO website.

How much do you need to pay?

When it comes to PAYG instalment payments, you generally have two options:

Option 1 – use the ATO’s calculated amount
The ATO estimates your instalment based on your latest tax return, so you don’t need to do any calculations.

Option 2 – calculate using your instalment rate
The ATO provides an instalment rate (a percentage) that you multiply by your business income for the period. This method is useful if your income fluctuates during the year, as your instalments will rise and fall with your earnings.

If you’re eligible to choose between these options, both will be shown on your activity statement or instalment notice. Choose your preferred option when you lodge, and you’ll continue using that option for the rest of the financial year. If you want to change options, you can do so on your first activity statement of the next financial year.

Important: no matter which option you choose, it does not change your final tax liability. It simply spreads your tax payments throughout the year, helping you manage cash flow and avoid a large lump-sum bill.

Can you change the amount?

Yes, you can vary your PAYG instalment if you expect your income to be higher or lower than the ATO originally estimated. This helps keep your tax payments aligned with your real cash flow.

But timing matters – you must make the variation on your activity statement or instalment notice before the due date for that instalment and before lodging your annual tax return for that year. After the due date passes, you generally can’t adjust that period – you’ll need to wait until the next one.

Be careful when reducing payments. If your varied instalments end up being 15% or more below your actual tax liability, the ATO may charge interest on the shortfall.

More information about varying your PAYG instalments can be found on the ATO website.

PAYGI vs PAYGW: a common mix-up

The names are similar, so it’s easy to confuse them but they apply to very different things:

PAYG instalments (PAYGI): these are advance payments towards your own income tax, helping you spread the cost across the year instead of paying a large amount at tax time.

PAYG withholding (PAYGW): this is tax you withhold from payments such as employee wages and remit to the ATO on their behalf.

Tips for managing PAYG instalments

Keep an eye on your profits: if your income changes during the year, review your instalments and vary them if needed so you’re not over- or under-paying.

Read ATO notices carefully: PAYG instalments are a legal requirement. Your activity statement or instalment notice tells you how much to pay and when it’s due.

Plan for cash flow: treat PAYG as part of your regular expenses. Setting funds aside as you earn can help you avoid surprises and stay in control of your finances.

How ANNA Money can help

ANNA Money is a business account designed to make financial admin simpler, especially for small businesses and sole traders.

With smart pots, you can set money aside specifically for tax obligations like PAYG instalments and GST, so funds are always ready when payments are due – instead of getting mixed up with everyday spending. You can even set a percentage of your income to automatically transfer into your tax pot, helping you stay on top of cash flow and avoid last‑minute panic.

ANNA also provides a business summary (coming soon) and real-time tracking of your financial position, giving you a clear view of your income and expenses in one place. This makes it easier to estimate your PAYG instalments and plan your cash flow throughout the year.

<<<< Back to ANNA +Taxes