✅ Updated 2026

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.

📋 In This Article

  1. →What are PAYG instalments?
  2. →Why tradies get them
  3. →How much do you pay?
  4. →When are they due?
  5. →Can you vary the amount?
  6. →What happens at tax time?
  7. →Managing cash flow
  8. →FAQs

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.

It is NOT a new tax. PAYG instalments are not extra tax on top of your normal tax. They are your normal income tax collected quarterly instead of annually. The total amount you pay over the year is essentially the same — just spread out.

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?

QuarterPeriodDue Date
Q1July – September28 October
Q2October – December28 February
Q3January – March28 April
Q4April – June28 July

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.

Warning: If you vary your instalments down and then your income ends up higher than estimated, you may face a shortfall when you lodge your return — plus a small interest charge if the variation was unreasonable. Vary conservatively, not aggressively.

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:

45% marginal rate kicks in
Net Annual Income% to Set AsideWhy
$60,000–$90,00020–23%Covers tax + Medicare + some buffer
$90,000–$120,00025–27%Hitting higher marginal rate
$120,000–$180,00030–32%37% marginal rate on upper portion
$180,000+35–40%

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.

Use Xero or Rounded to track your income in real time. Both show you a running estimate of your tax liability so you're never surprised by your instalment amount.

I just got my first PAYG instalment notice — what do I do?

Read the notice carefully. It will show either a fixed dollar amount (pay this by the due date) or an instalment rate (multiply by your quarterly income). Pay through myGov, BPAY or your BAS. Contact your accountant if the amount seems wrong — you can vary it before paying.

My income dropped this year — can I reduce my PAYG instalments?

Yes. Log in to myGov → ATO online services → Activity statements, and vary the instalment amount down. Or have your accountant do it on your BAS. Be reasonably conservative — if you vary down too aggressively and your income recovers, you may face a shortfall charge.

What happens if I don't pay my PAYG instalments?

Unpaid PAYG instalments accumulate interest (currently around 11% per annum) called the General Interest Charge. They also appear as a debt when you try to get a tax clearance certificate, which you might need for certain licences or contracts. Pay them on time or contact the ATO to arrange a payment plan if you're struggling.

I'm brand new to being self-employed — will I get PAYG instalments straight away?

No. The ATO enrolls you after you lodge your first tax return as self-employed and that return shows tax payable of $1,000+. In your first year of self-employment, you won't receive instalment notices. But you should still be setting money aside for the tax bill you'll face when you lodge your first return.

Can I voluntarily enter PAYG instalments before the ATO puts me in?

Yes — and it's a smart move if you know you'll have a significant tax bill. Log in to myGov → Tax → Manage → Tax Registrations → PAYG instalments. Spreading your payments quarterly beats a single large bill.