PAYG Instalments for Sole Traders: How They Work and How to Vary Them

Short answer: PAYG instalments are regular prepayments of the income tax on your business and investment income, worked out by the ATO from your latest tax return. The ATO enters you automatically once a return shows instalment income of $4,000 or more, tax payable of $1,000 or more and notional tax of $500 or more. Most sole traders pay quarterly, by 28 October, 28 February, 28 April and 28 July, either as an amount the ATO sets or as your income multiplied by its rate. Everything you pay is credited against your tax bill when you lodge. You can vary instalments, but if you set them below 85% of your actual tax, the ATO can charge interest on the shortfall.

The rules below are the ATO’s as they apply to the 2026–27 income year (1 July 2026 – 30 June 2027), whose first quarterly instalment is due on 28 October 2026. For the wider tax picture, see sole trader taxes in Australia. For the BAS labels, see how to do a BAS.

What are PAYG instalments?

PAYG instalments are income tax paid during the year instead of in one lump after you lodge. They aren’t an extra tax. Employees have tax withheld from every pay, but nobody withholds from a sole trader’s invoices, so instalments fill that gap.

The ATO works out your instalment from the business and investment income in your latest return. Under the amount option, it also adjusts the figure for likely income growth, based on changes in GDP. If you’re registered for GST, instalments sit in the PAYG section of your BAS. If you’re not, you receive a PAYG instalment notice instead.

Why did I get a PAYG instalment notice?

Because your latest return and assessment crossed all three of the ATO’s entry thresholds. The ATO enters you automatically when your most recent return shows:

Test	Threshold
Instalment income (gross business and investment income)	$4,000 or more
Tax payable on your notice of assessment	$1,000 or more
Estimated (notional) tax	$500 or more

This usually happens in your second year of trading. Tom started plumbing in July 2025, and nobody collected tax from him during 2025–26. He lodges that return in October 2026, the assessment shows a bill well over $1,000, and the ATO enters him into instalments for 2026–27. For a few months he’s paying last year’s bill and this year’s instalments at the same time. Setting money aside from the first invoice makes that manageable. Sole trader tax rates shows how much.

Should I pay the instalment amount or use the instalment rate?

The amount option is simpler, while the rate option tracks your income quarter by quarter. Neither changes the tax you owe for the year.

	Option 1: instalment amount	Option 2: instalment rate
Who calculates	The ATO sets a fixed amount	You multiply your instalment income by the ATO’s rate
BAS labels	T7, carried to 5A	T1 (income) × T2 (rate) = T11, carried to 5A
Best for	Steady income, minimal admin	Uneven or seasonal income
A quiet quarter	You still pay the full amount unless you vary	You pay less automatically

Example. Say the ATO gives Mia, a freelance designer, an instalment rate of 8%. In July–September 2026 she bills $22,000 in fees, excluding GST, so her instalment is $22,000 × 8% = $1,760, due 28 October 2026. If October–December is quieter at $12,000, she pays $960.

What counts as instalment income?

Instalment income is your gross business and investment income for the period, excluding GST. It isn’t your profit. The ATO’s instalment income rules list what goes in:

Include	Leave out
Gross sales and gross fees for services, excluding GST	GST you charged customers
Interest, rent, royalties and dividends	Franking credits
Your share of partnership or trust income	Salary and wages that had tax withheld, unless it was withheld because you didn’t give a TFN or ABN
Assessable foreign income and foreign pensions	Capital gains, unless you’re a super fund

If you use the rate, T1 is your gross takings, not takings minus expenses. Using profit there instead is the usual reason a rate-based instalment comes out too low.

When are PAYG instalments due?

Quarterly instalments follow the quarterly BAS dates on the ATO’s due dates page:

Quarter (2026–27)	Period	Due
Q1	July – September 2026	28 October 2026
Q2	October – December 2026	28 February 2027
Q3	January – March 2027	28 April 2027
Q4	April – June 2027	28 July 2027

There are two less common patterns:

• Annual instalments. These may be open to you if your most recent notional tax was under $8,000, you haven’t lodged the year’s first quarterly instalment, and you’re either not required to be registered for GST or voluntarily registered and reporting GST annually. Through a tax agent, the annual instalment is due by 21 October. If you prepare your own return, you don’t lodge the notice or pay the annual instalment; you just lodge the return by 31 October.
• Two instalments a year. These are only for individuals in primary production and “special professionals” such as authors, performing artists and sportspeople. You pay 75% by 28 April and the rest by 28 July.

BAS due dates covers weekend due dates and the extra time available through a registered agent.

How do I vary my PAYG instalments?

You can vary your instalments on the activity statement or instalment notice. You must do it on or before that instalment’s due date, and before you lodge your tax return for the year. You can also vary through ATO online services or your registered agent. The new amount or rate applies to the rest of the year’s instalments unless you vary again.

• Varying the amount: estimate the tax on your instalment income for the year. Each quarter’s payment brings your total paid so far to 25%, 50%, 75% and then 100% of that estimate. On a BAS this uses labels T8, T9 and T4 (reason code).
• Varying the rate: new rate = estimated tax ÷ estimated instalment income × 100. This uses T3 and T4.

Example. Jordan, a painter, has a set amount of $2,400 a quarter, based on a busy 2025–26. Work has slowed, and he now estimates the tax on his 2026–27 instalment income at $6,000. He pays $2,400 for Q1, then varies at Q2:

Quarter	Cumulative target	Already paid	Varied instalment
Q2	50% × $6,000 = $3,000	$2,400	$600
Q3	75% × $6,000 = $4,500	$3,000	$1,500
Q4	100% × $6,000 = $6,000	$4,500	$1,500

The 85% rule. If your varied instalments come to less than 85% of the tax you actually owe for the year, the ATO may charge the general interest charge on the difference. If Jordan’s tax turns out to be $8,000, 85% of that is $6,800. He paid $6,000, so interest can apply to the gap. The ATO’s PAYG instalments calculator helps you work out both the estimate and the varied figure.

What happens to PAYG instalments at tax time?

They’re credited against your income tax when your return is assessed. The ATO refunds any excess, or you pay the shortfall.

Suppose Tom paid four instalments of $1,800 in 2026–27, $7,200 in total. If his assessment shows tax and Medicare levy of $8,400, he pays the $1,200 difference. If it shows $6,500, the $700 overpayment is refunded, less any other amounts he owes the ATO. Pay every instalment before you lodge, so the credits are in place when the assessment is raised. The sole trader tax return explains the order.

Can I stop or cancel PAYG instalments?

Usually only when your business or investment income falls away. The ATO’s stopping PAYG instalments page lists the automatic exits. The cases most relevant to sole traders are:

• your return reports business and investment income under $4,000 (for residents)
• your assessment shows a tax debt under $1,000, after allowing for instalments and voluntary payments
• your notional tax is under $500, or your calculated instalment rate is 0.0%
• you lodge a final tax return or a non-lodgment advice

Once you’re eligible, you can ask to exit through myGov (Tax > Manage > Tax registrations > Cancel), through your registered agent, or by phoning the ATO on 13 28 61. If you’ve simply had a quiet year, vary instead.

…and where does Keel fit?

Instalments follow your income, so they’re only as accurate as your record of what you invoiced and when you were paid. Keel: Invoice Maker & Receipts, by Ilura Technology OÜ, is an iPhone app for keeping that record. An accepted estimate becomes the invoice in one tap. Invoices are PDFs, and receipts, expenses and business mileage are filed under their job. A “who owes you” list drafts reminders that you review and send yourself; nothing is sent automatically. Records stay on your iPhone, with no account, no bank connection and no cloud sync, and the App Store privacy label reads “Data Not Collected”.

Keel doesn’t calculate or vary PAYG instalments, lodge a BAS or connect to the ATO. You or your agent do that, using the records. It’s free with no invoice limit, and free invoices carry a small “Made with Keel” footer. Keel Lifetime is a one-time purchase ($249.99 USD; the App Store shows your local price) that adds custom branding, a signature, premium templates and accountant-ready exports. Keel on the App Store. There are more Australian guides in the Australia hub.

Frequently asked questions

Why do I have to pay PAYG instalments? Because your latest return showed instalment income of $4,000 or more, tax payable of $1,000 or more and notional tax of $500 or more. Once that happens, the ATO collects tax during the year rather than in one bill afterwards. Instalments aren’t extra tax: they’re credited against your income tax when your return is assessed.

What happens if I don’t pay my PAYG instalment? The unpaid instalment stays owing, and the general interest charge can apply from the due date until it’s paid. The tax still has to be paid when your return is assessed, now with interest on top. If you can’t pay, lodge on time anyway and contact the ATO about a payment plan, or vary the instalment if your income has genuinely dropped.

Is there a PAYG instalment calculator? Yes. The ATO’s PAYG instalments calculator helps you estimate your tax for the year, work out a varied amount or rate, and see any credit for instalments already paid. Use it before you vary, because a variation below 85% of your actual tax can attract the general interest charge.

Do PAYG instalments apply to my wages? No. Wages that already had tax withheld are left out of instalment income, unless tax was withheld because you didn’t give a TFN. Instalments cover business and investment income, such as sole trader takings, interest, rent and dividends.

What is T1 on my activity statement? T1 is your instalment income for the period under the rate option: gross business and investment income, excluding GST. Multiply it by your rate at T2 (or your varied rate at T3) to get T11, which goes to 5A. Under the amount option, you report the ATO’s amount at T7 instead.

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This article is general information, not tax advice. Consult a qualified Australian tax professional.