PAYG Instalments: Explained

You’ve lodged your tax return, paid what you owed and now a letter from the ATO arrives asking you to pay more tax every few months. Sound familiar?

“Why do I have to pay PAYG instalments?” is one of the most common questions our team gets.

The good news is that PAYG instalments aren’t actually an extra tax or a penalty. Instead, they’re a simple way of spreading your tax bill out across the year, rather than being hit with one big, fat tax bill at lodgement time.

What are PAYG instalments?

PAYG stands for “pay as you go”. PAYG instalments are regular prepayments of your income tax on business, self employment and/or investment income.

Think about how your salary or wages work. Your employer takes tax out of every pay and sends it to the ATO before your pay even hits your account, so by the end of the year most, if not all, of your tax is ideally already covered and you barely noticed it coming out. But some income streams don’t have tax taken out along the way. This can include:

• Rent received from an investment property
• Interest and dividends
• Income from your business or sole trader work
• Contracting income where no tax is withheld
• Trust distributions

and more.

Regular PAYG instalments fill that gap. Instead of paying all the tax on that income in one lump sum after you lodge your return, you pay it bit by bit during the year, as you earn it.

This means your tax keeps pace with your income, you avoid one huge bill, your cash flow stays steady and you reduce your risk of falling behind or going into debt.

Why have I been put into the PAYG Instalment system?

You don’t voluntarily sign up for PAYG instalments (although you can choose to if you wish). The ATO looks at your latest tax return and automatically enters you into it once your income crosses a certain threshold. For individuals, that’s generally when:

• Your business and/or investment income (instalment income) was $4,000 or more
• The tax payable on your latest Notice of Assessment (NOA) was $1,000 or more
• Your estimated tax for the upcoming year (notional tax) is $500 or more

If you’ve recently bought a rental property, started a side hustle or earned more interest than usual, that’s often what tips you over the threshold. The ATO then sends out a letter explaining how much you have to pay and when.

“But I already pay tax through my wages!” While that is true, the tax your employer withholds only covers your salary/wages. It doesn’t cover the tax owed on your rental income, dividends or business profit.

How do PAYG Instalments work?

The ATO uses the figures from your last tax return to estimate the tax you’ll owe on this year’s business and/or investment income. You’ll then receive an instalment notice each period, which will provide you with two options:

1. Pay the instalment amount. The ATO works out a set dollar figure for you to pay. This option is easy and doesn’t require any calculating from your end.
2. Use the instalment rate. The ATO gives you a percentage amount to pay, and you multiply it by your actual earned income for that instalment period. This is a good option if your income varies between instalment periods.

Most people pay quarterly PAYG instalments. For the 2026-27 financial year, the standard due dates are:

Meeting certain eligibility criteria may also allow you to pay your PAYG instalments in just one or two yearly instalments instead. For large businesses or entities with substantial business and investment income (generally $20 million+), you may be required to pay monthly instalments.

What happens at tax time?

Every PAYG instalment you pay during the year is credited against your final tax bill when you lodge your tax return.

Paid more than you owe? The difference comes back to you as a refund.

Paid less than you owe? You’ll have a smaller tax bill left to pay.

In other words, you’re not paying tax twice. You’re paying the same amount of tax, just earlier and in bite-size pieces.

Why do PAYG Instalments matter?

It’s easy to see instalments as a hassle, but they actually do you a few favours:

• No nasty lump sum at tax time: Without instalments, the tax on a year’s worth of rent or business profit lands all at once. Smaller, regular payments are much easier on your cash flow.
• Easier budgeting: You know approximately what’s due and when, so you can set that money aside as you go.
• Lower risk of penalties: Missing an instalment due date can attract attention from the ATO (think: general interest charge [GIC]), so paying on time keeps things clean and reduces your risk of penalties.

PAYGI hack: Open a separate savings account and pop a percentage of your rent or business income into it each month. When your instalment notice arrives, the instalment amount is already sitting there waiting to be paid, and you won’t feel like you’re haemorrhaging cash from your personal accounts.

Can I change or stop my PAYG instalments?

Yes. Circumstances change, and your instalments can too.

Varying your instalments: If you’ve sold a rental property, your business has had a quieter year or your income has dropped, you can vary your instalment amount or rate to a lower amount so you’re not overpaying. Just be careful: if you vary too low and end up well short of your actual tax, the ATO can charge interest on the difference. This is where seeking professional advice from an accountant or registered Tax Agent pays off.

Leaving the system: You’re automatically removed once your latest tax return shows you no longer meet the entry threshold criteria. You can also ask to exit if your business or investment income has dropped significantly below the threshold.

Joining voluntarily: Expecting a big jump in investment or business income? You can also opt in early to the PAYG Instalment system to avoid a large bill down the track.

We’re here to help

PAYG instalments can feel like one more thing on your plate, but they don’t have to be stressful. If an instalment notice has landed and you’re not sure whether the amount is right, don’t just pay it and hope for the best, or even worse, ignore it. A quick chat with one of our expert accountants could save you from overpaying or from a nasty shortfall when you lodge.

Our accountants help you check that your instalment amount is right, work out whether varying your instalments makes sense, plan ahead for big income changes like buying or selling a rental property or starting a business, and set up a simple savings plan so every instalment is covered before it’s due.

Got a PAYG instalment notice or a tax question? Contact us or call our Palm Beach office on (07) 5598 3800 or our Brookwater office on (07) 3333 2510.

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_{^{The material and contents provided in this publication are general and informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.}}