PAYG Instalments for Freelancers: What They Are and How to Manage Them

Most freelancers get a surprise letter from the ATO after their first or second tax return: you've been entered into the PAYG instalment system. You now owe quarterly tax payments throughout the year instead of one lump sum at tax time.

The initial reaction is usually annoyance. But PAYG instalments are doing you a favour. They spread your tax bill across the year so you're not staring at a massive payment in October with nothing saved.

What are PAYG instalments?

PAYG stands for Pay As You Go. The instalment system is the ATO's way of collecting income tax from people who don't have tax withheld from their pay. That includes freelancers, sole traders, and anyone with significant investment income.

When you're an employee, your employer withholds tax from every paycheck. When you're a freelancer, nobody withholds anything. PAYG instalments replicate that withholding mechanism by having you make quarterly payments to the ATO.

Key points:

• PAYG instalments are prepayments of your income tax, not an extra tax
• They're credited against your tax bill when you lodge your annual return
• If you've overpaid through instalments, you get a refund
• If you've underpaid, you pay the difference

When do PAYG instalments start?

The ATO enters you into the system automatically when:

• You lodge a tax return showing more than $1,000 in tax owed (after credits), and
• Your most recent notional tax is above the entry threshold

You'll receive a letter from the ATO telling you you've been entered into the system. Your first instalment will be due on the next quarterly due date.

Quarterly due dates

If you lodge a BAS, your PAYG instalments are reported on the same form. If you don't lodge BAS (not registered for GST), the ATO sends you a separate PAYG instalment notice each quarter.

Two calculation methods

The ATO gives you two options for calculating your quarterly instalment:

Option 1: Instalment amount

The ATO calculates a fixed dollar amount for each quarter based on your previous tax return. You just pay that amount four times a year. Simple.

Example: Your last return showed $24,000 in tax owed. The ATO sets your quarterly instalment at $6,000. You pay $6,000 each quarter regardless of what you actually earned that quarter.

This is the set-and-forget option. The ATO does the maths, you pay the bill.

Option 2: Instalment rate

The ATO gives you a percentage rate (your instalment rate), and you apply it to your actual income each quarter.

Example: Your instalment rate is 12%. In Q1, your freelance income was $35,000. Your instalment: $35,000 × 12% = $4,200.

This method is more work (you need to calculate income each quarter) but more accurate if your income varies significantly. You pay more in strong quarters and less in quiet ones.

Why your first year of instalments feels expensive

October of your first year in the system is rough.

You lodge your 2024-25 tax return in October 2025 and owe $15,000. The ATO enters you into PAYG instalments for 2025-26. Your first instalment is due 28 October 2025, the same month you're paying last year's tax.

Two bills in one month. It's not double taxation (the instalments are prepayments against next year's bill), but it's a cash flow shock if you're not expecting it.

How to vary your instalments

If your income has changed significantly from the previous year (up or down), you can vary your PAYG instalments to better match your actual situation.

When to vary down

• Your income has dropped significantly (lost a major client, taking time off, slow period)
• You've made large super contributions that will reduce your taxable income
• You have higher deductions than last year

When to vary up

• Your income has increased substantially (the ATO can charge interest if you underpay by too much)
• You want to avoid a large tax bill at the end of the year

How to vary

If you report on BAS: change the amount or rate in the PAYG instalment section of your BAS before the quarterly due date.

If you receive instalment notices: log into myGov and vary the amount before the due date.

The penalty for getting it wrong: If you vary your instalments down and your actual tax bill ends up being more than 85% higher than what you paid in instalments, the ATO can charge the General Interest Charge (GIC) on the shortfall. The GIC rate is currently around 11% per annum, so it's worth being reasonably accurate.

The practical approach: if your income is clearly lower this year, vary down. If you're not sure, stick with the ATO's calculated amount. It's based on your actual previous year, and overpayments get refunded.

PAYG instalments on your BAS

If you're registered for GST and lodge a quarterly BAS, your PAYG instalments appear in the PAYG income tax instalment section of the form.

The relevant fields:

• T7: Instalment income for the quarter (if using the instalment rate method)
• T8: Your instalment rate
• T9: The instalment amount (T7 × T8 if using rate method, or the ATO's calculated amount)

Your total BAS payment is your GST liability plus your PAYG instalment amount. For a freelancer earning $100k+, the PAYG instalment is often the larger portion of the BAS payment.

Setting aside money for instalments

We cover this in detail in our tax savings account guide, but the short version:

1. Open a separate savings account (most banks offer zero-fee options)
2. Transfer 30% of every client payment into this account as soon as it hits your business account
3. Pay your quarterly instalments from this account
4. Top up or withdraw at tax time based on your actual assessment

The 30% figure is a rough guide that works for most freelancers earning $60,000-$180,000. It covers income tax, Medicare Levy, and your PAYG instalments.

If you're also registered for GST, add another 9% to account for the GST component of your invoices. So transfer about 39% of each GST-inclusive payment.

What happens if you don't pay

Missing PAYG instalment deadlines triggers:

• General Interest Charge (GIC): Currently around 11% per annum on the outstanding amount, calculated daily from the due date
• Failure to Lodge (FTL) penalty: If you don't lodge your BAS on time, $313 per 28-day period up to a maximum of $1,565

The ATO is generally reasonable with first-timers. If you're going to miss a payment, contact them before the due date. They can set up payment plans and may remit penalties for genuine hardship.

Frequently asked questions

Can I opt out of PAYG instalments?

Only if your estimated tax for the year will be under $1,000. Request removal through myGov or by calling the ATO. If you exit but still owe more than $1,000 at tax time, you'll be re-entered.

Do PAYG instalments reduce my tax bill?

They don't change what you owe, but they're credited against it. Four quarterly instalments totalling $20,000 against an $18,000 tax bill = $2,000 refund. Against a $22,000 tax bill = $2,000 more to pay.

I've been overpaying. Can I get the money back sooner?

You can vary your instalments down if you believe you're overpaying. The refund of any excess is processed when you lodge your annual tax return. There's no mechanism to get mid-year refunds of overpaid instalments.

How do super contributions affect my instalments?

Voluntary super contributions reduce your taxable income, which means your actual tax bill will be lower than the ATO's calculated instalments. You can vary your instalments down to reflect this.

One catch: make sure you'll actually make those contributions. If you vary your instalments down based on planned super contributions and then don't follow through, you'll have a shortfall at tax time plus potential interest charges.

I just started freelancing. Will I get PAYG instalments immediately?

Not usually. Instalments start after you lodge your first tax return as a freelancer and owe more than $1,000. So if you start freelancing in January 2026, you won't see instalments until after you lodge that first return (likely October 2026 at the earliest).