PAYG instalments: how they are calculated, the dates and a worked example

Short answer: PAYG instalments are the ATO’s way of collecting income tax on business and investment income during the year, instead of in one bill after the return. You are entered into the system once your last return showed instalment income of $4,000 or more, tax payable of $1,000 or more and notional tax of $500 or more. You then pay each quarter, using one of two options. Option 1 is a fixed amount the ATO works out from your last return, uplifted by a GDP adjustment (5% for 2026-27). Option 2 is a rate the ATO gives you, multiplied by the instalment income you actually earned that quarter. Quarterly instalments are due on 28 October, 28 February, 28 April and 28 July. Whatever the instalments did not cover is paid when your return is assessed, and that is the catch in a good year: option 1 follows last year, so a growing business gets a bill after the return and bigger instalments straight after it. In the worked example below, the same company pays $31,500 during the year on option 1 and $39,375 on option 2.

Who has to pay them

The ATO enters you automatically once your most recent tax return shows all three:

• Instalment income of $4,000 or more. This is your gross business and investment income: sales, fees, interest, rent, dividends. It excludes GST, salary and wages (those already have tax withheld) and net capital gains.
• Tax payable of $1,000 or more on that return.
• Notional tax of $500 or more. Notional tax is the ATO’s estimate of your tax on last year’s figures, leaving out one-off items such as capital gains.

That covers sole traders and partners (personally, on their share of the profit), companies, trusts and self-managed super funds. You get a letter, and from then on the instalment appears on your BAS (or on an instalment activity statement if you are not registered for GST). A business that had a loss, or only just started, usually has no instalments yet.

Notional tax is tax, not profit. A company with a taxable income of $120,000 at the 25% base rate entity rate has notional tax of about $30,000.

Option 1 or option 2

	Option 1: instalment amount	Option 2: instalment rate
How it is set	The ATO takes your notional tax, applies the GDP adjustment and divides by four	The ATO gives you a rate: notional tax ÷ instalment income on your last return, as a percentage
What you pay each quarter	The same amount, shown on the BAS	Your instalment income for the quarter × the rate
2026-27 uplift	GDP adjustment of 5% (it was 4% for 2025-26)	None; the rate already follows your income
When it suits	Steady businesses that want a known amount	Growing, seasonal or falling income, because the payment moves with sales
Paperwork	Least: pay the figure	You report the quarter’s instalment income on the BAS

You can move from option 1 to option 2 at the start of an income year, with the first quarter’s activity statement. Once on option 2, you stay on it for the rest of that year.

The 2026-27 dates

For quarterly payers (most small businesses):

Quarter	Due
July to September 2026	28 October 2026
October to December 2026	28 February 2027 (a Sunday, so Monday 1 March 2027)
January to March 2027	28 April 2027
April to June 2027	28 July 2027

These are the same dates as a quarterly BAS, because the instalment is paid with it. If a tax or BAS agent lodges for you electronically, you may have later dates; they will tell you.

Annual instalments: if your notional tax is under $8,000 and you are not registered for GST (or you report GST annually), you can choose to pay one instalment a year instead, generally due on 21 October.

A worked example: a joinery company

These figures are made up. Bayside Joinery Pty Ltd is a base rate entity paying company tax at 25%. Its 2025-26 return, lodged in August 2026, shows:

• Instalment income (sales excluding GST, plus a little interest): $800,000
• Taxable income: $120,000, so tax of $30,000, which becomes the notional tax

Option 1: $30,000 × 1.05 = $31,500 for 2026-27, or $7,875 a quarter.

Option 2: $30,000 ÷ $800,000 = a rate of 3.75%. A busy July to September with $250,000 of instalment income gives a first instalment of $9,375.

2026-27 turns out busy. Two new builders keep the workshop full, instalment income for the year reaches $1,050,000 and taxable income $160,000. The company’s tax for the year is $160,000 × 25% = $40,000.

	Option 1	Option 2
Paid in instalments during the year	$31,500	3.75% × $1,050,000 = $39,375
Still owing when the return is assessed	$8,500	$625

On option 1 the company pays $8,500 after its return, and then its instalments for 2027-28 are based on $40,000 of notional tax (plus that year’s GDP adjustment), so over $10,000 a quarter. Both land in the months after the return, from a good year. The profit was there; the cash was not set aside for it. Why profit doesn’t always mean cash covers the same gap from the other side.

On option 2, the payments rose with the sales, so almost nothing was left to pay at the end. The price is uneven quarterly amounts and the extra BAS label to fill in.

What would have helped on option 1: setting aside for the year the business was actually having. $31,500 ÷ 12 = $2,625 a month covers the instalments. By November, the year-to-date profit was running about a third ahead, so lifting that to $40,000 ÷ 12, about $3,333 a month, would have had the $8,500 ready.

Varying your instalments

If you expect this year’s tax to be clearly lower (a lost contract, a quiet year, a big one-off expense), you can vary the amount (option 1) or the rate (option 2) on the activity statement for that quarter. The change applies to that quarter and the rest of the year, and you can claim back part of the instalments already paid in the year.

The risk is varying too low. If your varied instalments come to less than 85% of the tax you actually owe for the year, the ATO can charge the general interest charge (GIC) on the shortfall. Keep a note of how you worked out the estimate. If the year is going to be higher, you do not have to vary up: you pay the difference after the return. Just keep the cash for it.

In a loss year, option 2 pays little or nothing by itself, because it follows income at last year’s rate; on option 1, varying is how you stop paying tax on profit you are not making. Any instalments you paid that turn out to be more than the year’s tax come back as a credit when the return is assessed. Net operating loss covers how a loss year is treated.

Watching it in Xero

Xero does not know what your tax will be for the year, but it has the figures that drive it:

1. Accounting › Reports › Profit and Loss, set to this financial year to date and compared with the same period last year. If net profit is running well ahead, option 1 instalments will not cover the year. Xero Profit and Loss by month shows the setup.
2. The Activity Statement report has the PAYG instalment section. On option 2, check the instalment income Xero fills in against your sales excluding GST for the quarter, then apply your rate. The Xero BAS report walks through the whole statement.
3. Record each instalment when you pay it. For a company, code it to an income tax account on the Balance Sheet (often called Income Tax Payable or PAYG Instalments), not an expense. If you pay the BAS as one amount, split the payment: GST to the GST account, wage tax to PAYG Withholdings Payable, the instalment to the income tax account. For a sole trader, income tax is personal, so a payment from the business account is usually coded to drawings. Ask your accountant which accounts they want, so the figures tie up at year end.
4. Keep the money separate. A savings account holding GST, wage tax and income tax, topped up every week or month, is the simplest protection. How much to set aside for tax works out the percentages, and the cash runway calculator shows how long the rest lasts.

If you can’t pay an instalment

Lodge the BAS on time anyway, pay what you can, and set up a payment plan through ATO online services or your tax agent before the due date. Not lodging adds failure-to-lodge penalties on top of the GIC. Can’t pay your tax bill on time has the steps side by side with New Zealand and the UK.

Common mistakes

• Treating the instalment as the whole tax bill. On option 1 it follows last year. A growing business needs to set aside more than it is asked for.
• Forgetting the first year. Your first year with business income has no instalments, so the whole year’s tax is due after the return, and instalments for the current year start soon after. That can be a year and a half of tax from one year of cash.
• Coding instalments as an expense. They are payments towards income tax, not a cost of running the business, and coding them to expenses understates profit.
• Varying low to ease cash flow. Below 85% of the final tax, the GIC applies.
• Using sales including GST on option 2. Instalment income excludes GST, so including it overpays.

Common questions

What are PAYG instalments? Regular payments towards your income tax on business and investment income, paid during the year (usually quarterly with the BAS) so you do not get one large bill after the return.

How are PAYG instalments calculated? On option 1, the ATO takes your notional tax from your last return, adds the GDP adjustment (5% for 2026-27) and splits it into four quarterly amounts. On option 2, it gives you a rate (notional tax ÷ last year’s instalment income), which you multiply by each quarter’s instalment income.

When are PAYG instalments due? Quarterly: 28 October, 28 February, 28 April and 28 July, or the next business day if the date falls on a weekend. Annual payers usually pay on 21 October. A tax or BAS agent may have later dates.

Do I have to pay PAYG instalments? Only if the ATO has entered you, which happens when your last return showed instalment income of $4,000 or more, tax payable of $1,000 or more and notional tax of $500 or more. If you think you will owe much less tax this year, you can vary them.

Are PAYG instalments the same as PAYG withholding? No. PAYG withholding is the tax you take out of your employees’ wages and pay over on their behalf. PAYG instalments are towards your own (or your company’s) income tax. Both are paid with the BAS.

Can I claim PAYG instalments as a tax deduction? No. They are prepayments of income tax, credited against the tax on your return, not a business expense.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and the same month last year, cash in the bank, who owes you and bills due soon. It does not work out your PAYG instalments, but seeing profit running ahead of last year every week is the early warning that option 1 will not cover this year’s tax. It asks Xero for read-only access, and there is a 14-day free trial with no card.