PAYG Instalments for Self-Employed
How the ATO's pay-as-you-go instalment system works for sole traders and small businesses: entry thresholds, amount vs rate method, variation rules, safe harbour, first-year cash flow management, and the General Interest Charge.
PAYG instalments are quarterly prepayments of your expected income tax on business and investment income, collected under Division 45 of Schedule 1 to the Tax Administration Act 1953. The ATO automatically enters you into the system when your latest return shows instalment income of at least $4,000, tax payable of at least $1,000, and notional tax of at least $500. First-year sole traders are usually not in the system, meaning the entire first-year tax bill arrives on assessment, often alongside the start of compulsory instalments for year two.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact ATO. Read our editorial scope →
Who must pay PAYG instalments
The ATO applies a three-limb test to decide automatic entry for individuals and sole traders. All three must be satisfied on the latest lodged return: instalment income (business plus investment) of at least $4,000, tax payable on the notice of assessment of at least $1,000, and notional (estimated) tax of at least $500. Companies and super funds have different thresholds: instalment income of at least $2,000,000 or notional tax of at least $500.
Voluntary entry
Available where you expect a tax bill and want to smooth payments. Request this in myGov under Tax, Manage, Tax registrations, Add new registration, PAYG instalments. Voluntary entry is common advice for first-year sole traders and for people transitioning from employment to self-employment who know their new business income will not have tax withheld.
Instalment amount vs instalment rate method
The ATO offers two methods for calculating quarterly instalments. The method shown on your BAS or instalment notice determines your starting point, though many small sole traders can switch between them.
Instalment amount method
The ATO sets a fixed dollar figure per quarter based on last year's assessed tax on instalment income, usually increased by the GDP adjustment (4% for 2025-26). You pay the stated amount each period unless you vary. Simple and predictable, but does not automatically adjust if your income drops mid-year.
Instalment rate method
The ATO provides an instalment rate derived from your latest assessment. Each quarter you report actual instalment income at label T1, the ATO rate sits at T2 (or your varied rate at T3), and the result flows to T11 then to 5A as the PAYG instalment. This method self-adjusts each quarter based on actual income, making it better suited to volatile or seasonal businesses.
Varying instalments and the 85% safe harbour
Both methods allow variation. Under the amount method, you estimate your full-year tax and enter a new instalment amount at T8/T9 on the BAS. Under the rate method, you estimate full-year instalment income and tax, compute a new rate at T3, and the quarterly instalment recalculates. The ATO's safe harbour provides that if your total varied instalments for the year come to at least 85% of your final tax on instalment income, you are generally protected from underestimation penalties, provided you took reasonable care.
When to vary down
Common triggers include illness or injury reducing your capacity to work, loss of a major client or contract, economic downturn affecting your trade, or a seasonal business that front-loads income in particular quarters. Use the variation only when you have a genuine basis for a lower full-year estimate, not to defer tax that you know will be owed.
Quarterly payment schedule and BAS alignment
Standard self-employed and small business taxpayers pay quarterly, aligned with BAS due dates. If you are registered for GST, the ATO aligns your PAYG instalment cycle with your BAS cycle so both obligations appear on a single form.
Monthly and annual options
Monthly instalments apply mainly to very large entities (typically $20 million or more in tax). An annual instalment option is available for certain taxpayers with business or instalment income under $2,000,000, allowing a single payment with the return or a once-per-year notice. The ATO confirms eligibility in Online services.
First year of self-employment: the tax-shock trap
Because entry to PAYG-I is based on your latest tax return, most new sole traders are not in the system during their first year of trading. No compulsory instalments means the entire first-year tax on business income is due on assessment when the return is lodged. Simultaneously, the ATO will usually commence PAYG instalments for year two based on that first assessment.
Three strategies to manage first-year cash flow
First, voluntarily enter PAYG-I early via myGov so tax is prepaid quarterly during the first year. Second, set aside a percentage of each month's profit in a separate 'tax savings' account, using the eventual PAYG rate as a guide (15% to 25% of profit is typical for most sole traders). Third, make voluntary pre-payments to your income tax account through the ATO to build credit before the formal instalment system activates.
General Interest Charge on late or underpaid instalments
GIC is the ATO's default interest on late payment of most tax debts, including underpaid PAYG instalments and assessed income tax. The rate is set each quarter at the 90-day Bank Accepted Bill yield plus 7 percentage points, annualised and divided by 365 for a daily compound rate. For the quarter beginning 1 October 2025, the annual GIC rate is 11.17%. GIC runs automatically from the day after the due date until the liability is paid in full.
GIC is no longer deductible
From 1 July 2025, GIC and Shortfall Interest Charge are no longer deductible for income tax purposes. This means the cost is fully after-tax, making late payment significantly more expensive than it was under the previous deductible regime.
Remission
The Commissioner has discretion under section 8AAD of the Tax Administration Act to remit all or part of GIC. Remission requests are lodged through Online services or in writing, arguing special circumstances such as serious illness, natural disaster, ATO delay, or fair-and-reasonable grounds with a demonstrated good compliance history.
Worked example: income drops mid-year, varying down safely
Raj, a sole trader consultant in Darwin, starts 2025-26 on the amount method with quarterly instalments of $6,240 (based on $100,000 prior-year profit, $24,000 tax, plus 4% GDP uplift). By December, business slows and he expects only $60,000 profit for the full year.
Statute references
- Taxation Administration Act 1953, Schedule 1 Division 45 (PAYG instalments collection framework)
- Taxation Administration Act 1953 s 8AAD (GIC remission provisions)
- ATO PAYG instalments guide (entry criteria, variation rules, safe harbour)
- ATO BAS instructions (labels T1, T2, T3, T8, T9, T11, 5A)
Frequently asked questions
What is the difference between PAYG instalments and PAYG withholding?+
Can I voluntarily enter the PAYG instalment system in my first year?+
What happens if I vary my instalments too far down?+
Are PAYG instalments an extra tax on top of income tax?+
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