PAYG Instalments for Tradies — What They Are and What To Do

Getting a letter from the ATO about PAYG instalments is one of the most confusing moments for self-employed tradies. Most panic and think they owe money they haven't budgeted for. The reality is calmer than that — here's exactly what it means and what to do.

What Are PAYG Instalments — In Plain English

PAYG stands for Pay As You Go. Instalments are the ATO's way of collecting your income tax throughout the year in quarterly chunks, instead of waiting until you lodge your return and facing one massive bill.

Think of it as a prepayment plan for your tax. When you lodge your annual tax return, the PAYG instalments you've already paid are subtracted from what you owe. If you overpaid, you get a refund. If you underpaid, you pay the difference — but it's usually much smaller than a full year's tax bill at once.

Why Tradies Get PAYG Instalments

Employees never see this because their employer withholds tax from every pay. Self-employed tradies have no employer doing this — so the ATO puts you on the instalment system to collect your tax progressively.

The ATO automatically puts you into PAYG instalments when your last tax return shows:

• Tax payable of $1,000 or more after credits on your last assessment, AND
• Business or investment income of $4,000 or more

Once you're in the system, the ATO sends you an activity statement or instalment notice each quarter showing the amount to pay. You stay in the system until your circumstances change significantly.

How Much Do You Pay?

The ATO calculates your instalment amount based on your previous tax return. If you earned $120,000 last year and owed $32,000 in tax, the ATO divides that by four and asks you to pay roughly $8,000 per quarter.

You have two options:

Option 1 — Pay the ATO's calculated amount

The simplest option. The ATO tells you the amount on your BAS or instalment notice. You pay it. No calculation required. This works well if your income is consistent year to year.

Option 2 — Pay based on a percentage of your actual income

The ATO gives you an instalment rate (a percentage). Each quarter you multiply that rate by your actual business income for that quarter. Better if your income fluctuates significantly — you pay less in slow quarters and more in busy ones.

When Are Instalments Due?

If you're registered for GST, your PAYG instalment usually appears on your quarterly BAS alongside your GST obligation. You pay both together.

Can You Vary the Amount?

Yes — and you should if your income has changed significantly from last year. If this year is looking worse than last year (slower work, took time off, changed business focus), you can vary your instalment down so you're not overpaying throughout the year.

You vary through your myGov account linked to the ATO, or your accountant can do it. You can vary each quarter independently.

What Happens at Tax Time?

When you lodge your annual tax return, your accountant calculates your actual tax liability for the full year. Then they subtract every instalment you paid during the year.

• If instalments paid > actual tax owed: you get a refund
• If instalments paid < actual tax owed: you pay the difference
• If instalments paid = actual tax owed: zero balance

The goal of PAYG instalments is to get you close to zero at the end of the year — no large surprise bill, no large refund (because you've been paying the right amount progressively).

Managing Cash Flow as a Tradie on PAYG

The most practical approach: open a separate bank account (a Suncorp or Zeller sub-account works perfectly) and transfer a set percentage of every invoice payment into it. Based on your income level:

Set and forget — every time a client pays, move that percentage to your tax account. When the quarterly instalment arrives, the money's already sitting there.

## How Much Will Your PAYG Instalments Actually Cost? The amount the ATO asks you to pay in PAYG instalments is based on your previous year's tax bill. If you earned $80,000 last financial year and paid $18,000 in tax, the ATO will likely ask you to pay that same amount in instalments this year — split into quarterly payments of around $4,500. Here's where it gets tricky for tradies: if your income has grown significantly, you're paying instalments on last year's earnings while earning more this year. You could end up with a big tax bill at the end of the financial year if you haven't set aside enough. **The calculation works like this:** - Your previous year's tax liability is divided by 4 - You pay that amount quarterly (usually March, June, September, and December) - At tax time, the ATO calculates what you actually owe - If you've overpaid, you get a refund - If you've underpaid, you owe the difference For example, if you're a sparky who grossed $120,000 last year and your tax bill was $24,000, you'd pay $6,000 per quarter. But if you've already earned $140,000 this year, your actual tax liability might be $28,000 — meaning you'd owe an extra $4,000 at tax time. The best way to manage this is to keep accurate records throughout the year. Use accounting software like Xero or job management tools like Tradify so you know exactly where you stand financially. Track your income weekly, not just when tax time rolls around. ## Claiming Every Deduction Available to Reduce Your PAYG Bill Here's something most tradies don't realise: you can claim deductions that directly reduce your taxable income, which means lower PAYG instalments next year. The ATO allows Australian tradies to claim a huge range of work-related expenses — and most people leave money on the table by not claiming them. **Work vehicle expenses** are the big one. You can claim either: - **Cents-per-kilometre method:** 88 cents per kilometre (as of 2025–26) for work-related driving - **Actual cost method:** Fuel, maintenance, registration, insurance, and depreciation calculated from your logbook Most tradies benefit from the cents-per-kilometre method because it's simpler and often more generous. If you're driving 25,000 km per year for work, that's $22,000 in deductions — potentially saving you $6,600 in tax. **Other deductions tradies commonly miss:** - Tools and equipment under $20,000 can be instantly written off (until 30 June 2026) - Protective clothing and workwear (hi-vis, steel caps, hard hats) - Home office expenses if you work from home (desk, internet, phone) - Subscriptions to industry memberships and publications - Courses and training related to your trade - Mobile phone and internet costs (work-related portion) - Vehicle repairs, servicing, and replacement parts - Fuel and oil for tools - Work insurance premiums (public liability, professional indemnity) - Superannuation contributions beyond the compulsory 11.5% (non-concessional contributions) The key is keeping receipts and a logbook. When you claim a deduction, you need evidence. A photo of your receipt stored in your phone or accounting software is enough — you don't need to send the original to the ATO unless they ask for it. By claiming everything legally available to you, your taxable income drops. Next year, your PAYG instalments will be based on that lower figure, freeing up cash flow throughout the year. ## PAYG Instalments Comparison: Solo Tradie vs. Tradie with Staff | Factor | Solo Tradie | Tradie with Employees | |--------|------------|----------------------| | **PAYG instalments** | Based on your net income tax only | Based on your personal net income tax only | | **Employee withholding** | N/A | You withhold tax from staff pay, remit to ATO quarterly | | **Superannuation (11.5% SG)** | Your own contributions reduce taxable income | You pay SG for staff + your own contributions | | **Cash flow impact** | PAYG instalments + own tax | PAYG + employee withholding + SG payments | | **Quarterly ATO payments** | 1 payment (your PAYG) | 2–3 payments (your PAYG + employee withholding) | | **Complexity** | Lower — focus on your expenses | Higher — payroll admin required | | **Software needed** | Basic accounting software | Full payroll + accounting system | If you're moving from solo to hiring staff, your quarterly ATO payments become more complex. You'll need proper payroll software to handle employee withholding correctly. Mistakes here can be costly. --- ## FAQs About PAYG Instalments for Tradies ## How to Calculate Your PAYG Instalments Correctly The ATO doesn't just pluck a number out of thin air when they set your PAYG instalment amount. They base it on your previous year's tax return, specifically your tax payable amount. Understanding this calculation helps you prepare mentally and financially. Here's the basic formula the ATO uses: Your PAYG instalment = (Last year's tax payable ÷ 4) × number of quarters remaining Let's walk through a real tradie example. Say you're a plumber who lodged a tax return showing $15,000 in tax payable for the 2024-25 financial year. The ATO would divide this by four quarters, giving $3,750 per quarter. When they send you the instalment notice mid-year, you might have two quarters left to pay, so you'd need to pay $7,500 total. The key thing most tradies miss: your PAYG instalment is based on *last year's* profit, not this year's. So if your business was booming last year but you're quieter now, you're still paying based on the higher amount. Conversely, if you had a slow year last year but you're smashing it now, you might be underpaying — which means a bill at tax time. Your instalment amount is issued by 1 June each financial year, and payments are due quarterly: 28 October, 28 December, 28 February, and 28 April. The ATO does have a mechanism to help here. If you believe your current year's income will be significantly different from last year, you can apply to have your instalments varied. This requires proof — your accountant or tax agent can lodge a variation request with the ATO, and if approved, your quarterly amounts adjust to reflect your actual expected tax payable for the current year. Don't ignore a variation request if your circumstances have genuinely changed. A significant drop in income means you could be cash-flowing money you'll get back at tax time — money you could use for new equipment, vehicle maintenance, or a safety buffer. ## Setting Up a System to Handle PAYG Instalments This is where most tradies drop the ball. They treat the instalment notice like a surprise bill rather than a predictable business expense. The difference between stressed tradies and organised ones? A simple system. Your first step is converting the quarterly PAYG amount into a weekly or monthly cost. If your annual instalment is $12,000, that's $3,000 per quarter or roughly $1,000 per month. Now treat this like any other business expense — it's not optional, and it's not yours to spend. Many successful tradies set up a separate savings account just for PAYG. Every week, they transfer a portion of their income into this account. Some use the Xero accounting software to automate reminders when payments are due, so you're never caught off-guard. Your invoicing system matters too. If you're using Tradify to manage your jobs, you can tag each invoice with a cost code so your profit calculations are accurate throughout the year. This gives you real visibility into whether your estimated tax will match reality. Here's a practical approach used by electricians, plumbers, and builders on tradiemoneyau: 1. **Receive the instalment notice** — write down the quarterly amount and due dates in your calendar (phone calendar with notifications) 2. **Calculate the weekly amount** — divide the quarterly amount by 13 weeks 3. **Set up automatic transfer** — every Friday or payday, transfer that weekly amount to a separate account 4. **Use accounting software** — log into Xero or similar to track your actual profit against your estimate 5. **One month before due date** — check your separate account has sufficient funds and make the payment early This removes all mystery from the process. You're not gambling with money you haven't set aside. ## PAYG Instalments vs. Other Tax Obligations | **Tax Obligation** | **When It's Due** | **What It Covers** | **Amount** | |---|---|---|---| | **PAYG Instalments** | 28 Oct, 28 Dec, 28 Feb, 28 Apr | Tax estimate on current year income | Quarterly amount set by ATO | | **GST (if registered)** | Monthly or quarterly | Sales tax collected | % of turnover after claims | | **Superannuation** | By 28th following quarter end | Employer contribution | 11.5% of wages (2025-26) | | **Income Tax (at tax time)** | 31 October lodgement | Full year tax bill | Final amount after all deductions | | **Medicare Levy** | Built into tax return | Medicare contribution | 2% of taxable income | The critical difference: PAYG instalments are a *prepayment* of tax you'll owe. You're not paying tax twice — you're paying it gradually instead of in one lump sum. If you've overpaid through instalments, you get it back as a refund when you lodge your tax return. If you've underpaid, you owe the difference. Don't confuse PAYG instalments with GST. If you're GST-registered, GST and PAYG instalments are separate. You can claim GST back on business expenses, which reduces your quarterly GST payment, but this doesn't affect your PAYG instalments. ## Frequently Asked Questions ## Setting Aside Money for PAYG Instalments The biggest mistake tradies make is spending their PAYG instalment money on business expenses or personal purchases. When the ATO comes calling, the cash isn't there. Here's the practical approach: treat PAYG instalments like you'd treat tax itself — they're a non-negotiable business cost. The moment you receive that ATO letter, calculate your quarterly or bi-annual instalment amount and divide it by the number of weeks until payment is due. Set that amount aside weekly into a separate account. For example, if you owe $3,000 in quarterly instalments, that's roughly $230 per week you need to lock away. Some tradies use an offset account linked to their business loan, others use a basic savings account. The key is making it physically separate from your operating account so you're not tempted to dip into it. Software like Xero or Tradify can automate invoicing and profit tracking, making it easier to forecast how much you'll actually owe. ## PAYG Instalments vs. Your End-of-Year Tax Bill Tradies often confuse PAYG instalments with their final tax bill, thinking they're the same thing. They're not — and understanding the difference is crucial to your cash flow. PAYG instalments are advance payments based on your **estimated** income for the year. The ATO calculates these using your previous year's tax or your notified amount. You pay these throughout the year in instalments (usually quarterly). Your end-of-year tax bill is based on your **actual** income minus deductions. This is calculated when you lodge your tax return in October. Here's what happens next: - If you've overpaid via instalments, you get a refund - If you've underpaid, you'll owe the difference - If you've paid the right amount, you're square **Key deductions tradies miss:** - Vehicle expenses (88c/km for 2025-26) - Tools and equipment under the $20,000 instant write-off threshold - Uniforms and safety gear - Phone and internet (work-related portion) - Work-related travel - Home office expenses (if you run admin from home) - Superannuation contributions (up to $30k concessional cap) - Professional memberships and training Missing these deductions means overpaying tax all year. That's money you could've kept in your business. ## FAQ ## How to Calculate Your PAYG Instalments Step-by-Step The ATO calculates your PAYG instalments based on your previous year's tax liability, not your actual income. This is critical to understand because your instalments might be based on a year when you earned more than you're earning now, or vice versa. Here's how it works in practice: **The ATO looks at your last tax return and takes your total tax liability.** Let's say last financial year you paid $8,000 in tax. The ATO will divide this into four quarterly instalments of $2,000 each (payable in October, January, April, and July). You'll receive a notice showing these amounts. **The issue most tradies face:** This calculation assumes your income stays the same. But tradies' income varies wildly. You might have a bumper year, then a quiet year. If last year was huge, you're paying instalments based on that inflated figure, even though this year's quieter. **What you can do about it:** The ATO allows you to request a variation to your PAYG instalments if you genuinely believe you'll earn significantly less. You need to lodge a PAYG Variation request through the ATO portal or contact them directly. You'll need to provide evidence—profit and loss statements, quotes for upcoming work, whatever shows why your income will be lower. The variation works in your favour too. If you've got a massive year ahead (new contract, expansion), you can request higher instalments to avoid a big bill at tax time. **Practical timing:** Request variations by October if possible, so they take effect for the next quarter. Otherwise, you're stuck with the original amounts until the ATO processes your request. ## Building a PAYG Buffer System That Actually Works Most tradies get stung by PAYG because they don't set money aside systematically. Then the quarterly bill arrives and suddenly $2,000–$3,000 is gone from cash flow that was earmarked for materials, fuel, or wages. **The buffer method:** Set up a separate high-interest savings account specifically for tax. Every time you invoice a client, calculate your tax liability and move that amount into this account. Don't touch it. Here's the formula: Take your expected profit margin (gross income minus direct costs) and multiply by 45%. This gives you a rough tax buffer. It's conservative, but tradies working as sole traders or partnerships paying the top marginal rate need to account for the full 47% tax bracket plus Medicare levy. **Example for a plumbing business:** - Monthly invoice total: $15,000 - Direct costs (materials, subcontractors): $6,000 - Gross profit: $9,000 - Tax buffer (45%): $4,050 per month - Set aside: $4,050 into tax account **Automate this process.** If you're using Xero or Tradify, set up automatic transfers to your tax account when invoices are marked paid. You won't miss the money, and you'll never be caught short. **The secondary benefit:** When you lodge your tax return and receive a notice of assessment, you'll already have the money set aside. If you've overpaid, that money's yours to reinvest. If you've underpaid (which is rare with this method), you've got the buffer to cover it. ### PAYG Instalments vs. Actual Tax: What's the Difference? | **Aspect** | **PAYG Instalments** | **Your Actual Tax Bill** | |---|---|---| | **Based on** | Previous year's tax liability | Current year's actual income and deductions | | **Timing** | Quarterly payments (Oct, Jan, Apr, Jul) | Due when you lodge tax return (31 Oct) | | **Amount** | Fixed unless you request variation | Calculated based on your real profit | | **Penalties** | Can apply if you underpay or miss dates | Interest charged if you owe money at tax time | | **What happens** | Credited against your final tax bill | Subtracted from what you actually owe | | **Best case** | You've overpaid and get a refund | You've paid enough and owe nothing | | **Worst case** | You've underpaid and owe a lump sum | Same—you still owe money at lodgement | The key difference: instalments are a *guessing game* based on last year. Your actual tax is *calculated* based on this year. That's why the variation request matters so much. ## Frequently Asked Questions About PAYG Instalments ## Managing Cash Flow With PAYG Instalments The biggest mistake tradies make with PAYG instalments is treating them as a surprise bill rather than a predictable business expense. Once the ATO sets your instalment amount, you know exactly what's due each quarter. This is actually an advantage if you plan properly. Here's the reality: if you earned $80,000 last financial year, the ATO will estimate you'll earn similar this year and ask you to pay tax in instalments throughout the year rather than in one lump sum at tax time. For most tradies, this works out to roughly one-quarter of your expected annual tax bill, due four times per year. The smart approach is to treat PAYG instalments like a client invoice you've already issued to yourself. When you invoice a client for $5,000, you don't spend that money—it's earmarked for tax. Same principle applies here. **Set up a separate bank account** specifically for tax and PAYG instalments. Every week, transfer a percentage of your income into this account. If your annual turnover is $120,000 and you estimate your tax at around 30-35% of profit (varies by deductions), you'd want roughly $10,000-$14,000 set aside annually. Divide that by 52 weeks, and you're looking at $200-$270 per week going into your tax account. This approach eliminates the panic when an instalment is due. You've already budgeted for it. Tools like Xero or Tradify can help you track this automatically. Both allow you to allocate portions of income to tax reserves, so you're always clear on what you've actually got available to spend on materials, wages, or equipment. ## Adjusting Your PAYG Instalments if Your Income Changes Here's what the ATO won't tell you loudly enough: **you can change your PAYG instalment amount if your circumstances change**. Most tradies don't know this and end up paying too much or too little. If your income drops significantly—say you break your leg mid-year or work dries up—you can apply to the ATO to reduce your instalments. This is crucial because continuing to pay high instalments when you're not earning puts genuine pressure on your business. Conversely, if you've had an exceptionally good year and earned way more than the ATO expected, your current instalment amount might be too low. You can increase it voluntarily to avoid a massive tax bill at the end of the financial year. **How to make changes:** Contact the ATO directly (131 865) and explain your situation. Provide evidence—bank statements, profit and loss projections, or updated turnover figures. The ATO is surprisingly reasonable about this if you provide genuine numbers. Ideally, do this in writing via your ATO online account so you have a record. You'll need to show: - Current financial year income to date (if applying mid-year) - Projected income for the full year - Any significant changes in circumstances - Supporting documents like invoices or bank statements **Timing matters here.** If you wait until June to tell the ATO your income dropped in March, you've already overpaid three quarters of instalments. Flag changes as soon as they happen. The other scenario many tradies face: you've underestimated your income growth. If you're tracking 20% ahead of last year's earnings, it's worth increasing instalments voluntarily rather than facing a $5,000+ bill in July. div style="background:#FEF3C7;border-left:4px solid #F59E0B;border-radius:0 8px 8px 0;padding:16px 20px;margin:20px 0;">

TIP: The ATO can help you calculate a revised instalment amount based on your current year's actual income. Ring 131 865 before June 30 each year for a quick calculation. This prevents overpaying and gives you cash flow breathing room when you need it most.