Prepaying your own tax, to avoid one large bill later
A letter arrives. The ATO wants you to start paying tax — now, in instalments, before your tax return has even been lodged.
It can feel like an unexpected new obligation. It's actually the system working as intended — designed to prevent a much larger surprise later.
The short answer
PAYG instalments are regular prepayments toward your income tax on business and investment income, usually paid quarterly. They're not an extra tax — they're your own tax, paid progressively through the year rather than as one lump sum when you lodge your return. When you lodge, the instalments you've already paid are offset against your actual tax bill.
Why this exists
Employees have tax withheld from every pay, so they rarely face a large bill at tax time. Business owners and investors, whose income isn't withheld this way, can otherwise face a substantial tax bill for an entire year's income all at once. PAYG instalments spread that same obligation across the year instead, so the year-end return becomes a reconciliation rather than a first tax payment.
How you enter the system
Automatically. If you lodge a tax return with instalment income above the entry threshold, the ATO will generally enrol you automatically going forward.
Voluntarily. If you're new to business, or expect income above the threshold, you can choose to enter voluntarily — useful for staying ahead of tax rather than being caught out later.
If your income later drops below the relevant threshold, the ATO will generally remove you from the system automatically.
The two ways instalments are calculated
Instalment amount. The ATO calculates a fixed dollar amount for you each quarter, based on your most recent tax return — the simplest option, requiring no calculation on your part.
Instalment rate. The ATO provides a percentage rate, which you apply to your actual business and investment income for the quarter — better suited to income that varies significantly, since it moves with your actual results rather than being fixed to a past year.
A simple example
A sole trader is notified of an estimated annual instalment total of $20,437. Dividing this across the year — roughly $393 a week — gives a sense of what to set aside regularly, so that when each quarterly BAS or instalment notice arrives, the money is already there rather than needing to be found.
What happens at tax time
You lodge your annual income tax return as normal, declaring your actual income for the full year.
Your actual tax liability is calculated based on that return.
The PAYG instalments you've already paid during the year are offset against that liability.
You pay any remaining balance — or, if you've paid more in instalments than you owed, you receive a refund of the difference.
Varying an instalment if your income changes
If your actual income for the year looks likely to be meaningfully different from what the ATO's calculated instalment assumes, you can vary the amount — but this needs to be based on a genuine, reasonable estimate. Varying instalments too far below what you'll actually owe (generally below 85% of your total tax payable) can trigger a general interest charge on the shortfall, so this isn't a lever to pull casually to defer tax.
A quick self-check
Am I currently in the PAYG instalment system, and do I understand why?
Do I know whether I'm paying by instalment amount or instalment rate, and which suits my income pattern better?
Have I set aside the money for each instalment before it's due, or am I scrambling each quarter?
If my income has changed significantly, have I considered a genuine variation rather than letting the ATO's estimate run on?
Free official resource
The ATO explains how PAYG instalments work, including entry thresholds and calculation methods.
ato.gov.au — Starting PAYG instalments https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/starting-payg-instalments
When should you get professional help?
you've just been enrolled in PAYG instalments and want to understand what it means for your cash flow;
your income varies significantly and you're not sure whether the instalment amount or rate method suits you better;
you think your instalments no longer reflect your actual income and want a proper variation calculated; or
you want to enter voluntarily to get ahead of a growing tax obligation.
Continue learning
→ How Much Should I Put Aside for BAS and Tax?
→ Understanding BAS — What Am I Actually Reporting and Paying?
→ Why Is My Taxable Profit Different From the Profit in My Accounts?
SKC Accounting | Knowledge Centre | Knowledge Guide 069
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.