There is no single ATO percentage for sole traders. In 2026-27 your set-aside depends on your profit, your other income, and two offsets most rough guides ignore. This guide works the real tax on four profit levels, explains PAYG instalments, and shows why GST money must sit in a separate pot.
Rates last reviewed: October 2026. Financial year 2026-27 (1 July 2026 to 30 June 2027), checked against Australian Taxation Office (ATO) tax rates for Australian residents, the ATO guidance on starting PAYG instalments, and the ATO guidance on registering for GST.
Search intent: you are paid with no tax withheld and need a percentage of profit to move into a tax account today, and to know whether PAYG instalments replace that habit.
How much tax should an Australian sole trader set aside?
Set aside a percentage of your profit, not your turnover, based on your expected total tax for 2026-27. A sole trader with no other income needs about 7 percent on A$40,000 of profit, 14 percent on A$60,000, and 20 to 23 percent on A$90,000 to A$120,000, before any extra for super or a HELP debt.
That range surprises people who have only seen the 25 to 30 percent rule of thumb. It over-saves for a full-time sole trader on a modest profit and under-saves for a side hustle stacked on top of wages. You and the business are the same taxpayer: your profit is added to any wages or other income and taxed once at individual rates. No client withholds tax for you, so move money on the day you are paid.
Tip: Use a separate tax pot account. On every payment, if GST-registered, move the GST portion first, then your income tax percentage of the remaining profit.
What makes up a sole trader tax bill in 2026-27?
Four parts make up most bills: income tax at resident rates on your taxable income, minus the low income tax offset if you qualify, minus the small business income tax offset on your business income, plus the Medicare levy at 2 percent of taxable income for most residents.
Income tax, 2026-27 resident rates. The tax-free threshold is A$18,200 for a full-year resident. Above that, the ATO rates are:
| Taxable income | Tax on this income, 2026-27 |
|---|---|
| A$0 to A$18,200 | Nil |
| A$18,201 to A$45,000 | 15c for each A$1 over A$18,200 |
| A$45,001 to A$135,000 | A$4,020 plus 30c for each A$1 over A$45,000 |
| A$135,001 to A$190,000 | A$31,020 plus 37c for each A$1 over A$135,000 |
| A$190,001 and over | A$51,370 plus 45c for each A$1 over A$190,000 |
Note the year: the second rate fell from 16 percent in 2025-26 to 15 percent in 2026-27. Your marginal rate is the rate on your next dollar. Your effective rate is always lower, because the first A$18,200 is tax-free and lower bands apply to slices below your top band.
Low income tax offset (LITO). Up to A$700 if taxable income is A$37,500 or less, phasing out to zero at A$66,667.
Small business income tax offset (SBITO). If aggregated turnover is under A$5 million, 16 percent of the tax on your net small business income, capped at A$1,000 a year. Wages are not small business income, so a side hustler gets it only on the business share.
Medicare levy. Generally 2 percent of taxable income, with low-income reductions. This guide does not fold in HELP repayments or the Medicare levy surcharge: if you have a HELP debt, add that rate on top. Model revenue minus deductions with LancerBill’s profit margin calculator before applying a percentage. For what counts as an allowable deduction, see our guide to sole trader tax deductions in Australia.
Worked example: tax on a 90,000 dollar profit, step by step
Assumptions, stated in full: Australia, tax year 2026-27, a freelance designer in Melbourne who is an Australian resident for the full year, an ABN holder trading as a sole trader, with no other income. Turnover excluding GST is A$110,000, allowable business deductions are A$20,000, so business profit and taxable income are both A$90,000.
- Step 1, income tax. A$4,020 on the first A$45,000 (after the tax-free threshold and the 15 percent band), plus 30 percent of the next A$45,000. 0.30 x 45,000 = A$13,500. Income tax = 4,020 + 13,500 = A$17,520.
- Step 2, LITO. Taxable income of A$90,000 is above the A$66,667 phase-out end point, so LITO = A$0.
- Step 3, small business offset. All A$90,000 is net small business income, so 16 percent x A$17,520 = A$2,803.20, capped at A$1,000. Offset = A$1,000.
- Step 4, Medicare levy. 2 percent x A$90,000 = A$1,800.
- Step 5, total. 17,520 – 1,000 + 1,800 = A$18,320.
Set-aside rate: 18,320 / 90,000 = 20.4 percent of profit. That is A$4,580 per quarter, or A$352.31 per week (18,320 / 52). Apply it to profit after stripping out GST. Check GST separately with LancerBill’s GST calculator, which handles the one-eleventh extraction on inclusive prices.
What percentage should you set aside at different profit levels?
Use a percentage matched to your profit level and your other income, then review it each quarter. The table below uses the same 2026-27 method as the worked example: resident rates, LITO, the small business offset capped at A$1,000, and the full 2 percent Medicare levy, with no other income.
| Business profit (no other income) | Income tax before offsets | After LITO and small business offset, plus Medicare | Total tax | Set aside, percent of profit |
|---|---|---|---|---|
| A$40,000 | A$3,270 | 3,270 – 575 – 523 + 800 | A$2,972 | 7.4 percent |
| A$60,000 | A$8,520 | 8,520 – 100 – 1,000 + 1,200 | A$8,620 | 14.4 percent |
| A$90,000 | A$17,520 | 17,520 – 0 – 1,000 + 1,800 | A$18,320 | 20.4 percent |
| A$120,000 | A$26,520 | 26,520 – 0 – 1,000 + 2,400 | A$27,920 | 23.3 percent |
This table shows why the percentage climbs: you use the tax-free threshold once, LITO disappears, and more of each extra dollar lands in the 30 percent band.
The side-hustle warning. Change one assumption and the answer jumps. Take wages of A$60,000 plus a business profit of A$30,000, for the same A$90,000 total. Tax on the wages alone, with LITO of A$100 and Medicare of A$1,200, is A$9,620, normally covered by employer withholding. Tax on the combined A$90,000, with a small business offset of A$934 on the business share only (16 percent of one-third of A$17,520), is A$18,386. The extra tax caused by the business is 18,386 – 9,620 = A$8,766 on A$30,000 of profit, or 29.2 percent. If you freelance beside a job, budget near 30 percent of business profit, not the 20.4 percent in the table.
Watch out: setting aside a percentage of turnover instead of profit is the most common budgeting error. A trader who bills A$90,000, spends A$30,000 on materials, subcontractors and software, and saves 20 percent of billings has saved on money that was never income. Work from profit: turnover minus GST, minus allowable expenses.
Our guide on how to invoice as a sole trader in Australia covers the ABN and tax invoice wording behind every payment, and you can raise invoices with LancerBill’s invoice generator.
How do PAYG instalments change what you set aside?
PAYG instalments do not change how much tax you owe. They change when you pay it. Instead of one bill after you lodge your tax return, you prepay tax on your business and investment income during the year, usually quarterly, and those prepayments are credited against your final assessment.
The ATO enters sole traders automatically after a return shows all three of these: instalment income of A$4,000 or more, tax payable of A$1,000 or more, and estimated notional tax of A$500 or more. That is why year one often ends with one large bill and year two adds quarterly instalments on top. You can also enter voluntarily through myGov or your tax agent.
On each activity statement or instalment notice the ATO gives you one of two ways to pay:
- Instalment amount. A fixed dollar figure worked out from your last return. Simple to budget, but it does not move if your income falls or rises mid-year.
- Instalment rate. A percentage, shown as T2, that you apply to your instalment income for the period, shown as T1. Instalment = T1 x T2. This method rises and falls with what you actually earn that quarter.
Your tax pot funds the instalments. Keep the weekly habit, pay each quarterly instalment from the pot, and do not double-count: an instalment is a prepayment of the same tax, not an extra tax.
Varying an instalment. If income drops, you can vary the amount or rate down by the due date on your activity statement. Vary with care: if your varied instalments total less than 85 percent of the tax you actually owed on instalment income, you may be charged the general interest charge (GIC) on the difference, and penalties can apply. If unsure, do not vary: overpayments are refunded after you lodge.
Rule of thumb: vary an instalment only when you can show your working, with current year-to-date profit and a realistic forecast for the rest of the year, and keep that calculation on file.
Why is GST money separate from your tax pot?
GST is not your income and it is not income tax. If you are registered, one-eleventh of every GST-inclusive amount you collect is GST you hold for the ATO, reported on your Business Activity Statement (BAS) and reduced by GST credits on your business purchases. Spending it is borrowing from your next BAS.
Registration turns on GST turnover, not profit. Register within 21 days once GST turnover reaches A$75,000, tested on the current month plus the previous 11 months, or the current month plus the next 11 months if you expect to reach it. A trader with A$80,000 of billings and A$45,000 of profit is still over the threshold. Taxi and ride-sourcing drivers must register regardless of turnover.
That gives you a clean three-pot system, the framework for every payment:
| Pot | What goes in, on each payment | What it pays |
|---|---|---|
| 1. GST pot (only if registered) | One-eleventh of the GST-inclusive amount received | Your BAS: GST collected minus GST credits on purchases |
| 2. Income tax pot | Your set-aside percentage from the table above, applied to profit excluding GST | Quarterly PAYG instalments, then any balance on assessment |
| 3. Super pot (voluntary for your own income) | A percentage you choose. Many sole traders use the 12 percent super guarantee rate employees get as a benchmark, not a rule | Voluntary personal superannuation contributions, which may be tax-deductible if you meet the notice rules |
Sole traders do not have to pay super for themselves. If you hire staff or certain contractors, super guarantee does apply to them: see our superannuation guarantee guide and our Australia GST guide for pot 1.
What mistakes leave sole traders short at tax time?
The shortfall pattern is consistent: saving a flat percentage of turnover, forgetting that a day job has already used the tax-free threshold, spending the GST, and varying PAYG instalments down on a guess. Each one is fixable with a quarterly review.
- No quarterly review. Recheck your percentage when you prepare your BAS. A pay rise, a lost client, or one large project moves your marginal rate.
- Expenses guessed. Profit is only as good as your deduction records. Keep a running expense log, not a shoebox in June.
- First-year double hit. Your first assessment can arrive alongside your first PAYG instalments for the next year. Hold a buffer in year one.
- Super at zero. No employer contributes for you. Even a small voluntary contribution beats starting later. Check concessional caps and the notice of intent rules first.
Key takeaways
- Set aside a percentage of profit, not turnover: about 7 percent at A$40,000 of profit, 14 percent at A$60,000, and 20 to 23 percent at A$90,000 to A$120,000 in 2026-27, with no other income.
- Beside a job, budget closer to 30 percent of business profit, because your wages have already used the tax-free threshold and lower bands.
- Your bill is income tax at 2026-27 resident rates, minus LITO and the small business offset (16 percent, capped at A$1,000), plus the 2 percent Medicare levy.
- PAYG instalments are prepayments of the same tax, usually quarterly. The ATO enters you automatically once instalment income, tax payable and notional tax pass its three thresholds, or you can enter voluntarily.
- Never vary instalments on a guess: varied instalments below 85 percent of your actual tax can attract the general interest charge on the difference.
- Keep GST separate: one-eleventh of inclusive receipts if you are registered. Registration is required within 21 days at A$75,000 of GST turnover, which is gross income, not profit.
Frequently asked questions
How much tax should I set aside as a sole trader in Australia?
It depends on profit and other income. With no other income in 2026-27: A$2,972 on A$40,000 of profit (7.4 percent), A$8,620 on A$60,000 (14.4 percent), A$18,320 on A$90,000 (20.4 percent) and A$27,920 on A$120,000 (23.3 percent), after offsets, including Medicare. Beside a job, budget nearer 30 percent.
When does the ATO put a sole trader into PAYG instalments?
After a lodged return shows instalment income of A$4,000 or more, tax payable of A$1,000 or more, and estimated notional tax of A$500 or more, per ATO guidance. Entry is then automatic. You can also ask to enter voluntarily through myGov linked to the ATO, or through your tax agent, before those thresholds are met.
What happens if I vary my PAYG instalments too low?
If your total varied instalments for the year are less than 85 percent of the tax you actually owed on your instalment income, the ATO may apply the general interest charge on the difference, and penalties can apply in some circumstances. Keep a written estimate behind any variation and review it each quarter.
Is the 25 to 30 percent rule of thumb wrong?
Not wrong, just blunt. It over-saves for a full-time sole trader on A$40,000 to A$60,000 of profit, where the real 2026-27 bill is 7 to 14 percent, and it is about right for a side hustle taxed on top of wages, where the worked example here reaches 29.2 percent. Use it only until you have run your own profit through the rates table.
Do I set aside GST on top of income tax?
Yes, but in a separate pot and only if you are registered. Move one-eleventh of each GST-inclusive payment aside for your BAS, then apply your income tax percentage to your profit excluding GST. Registration is required within 21 days once GST turnover reaches A$75,000, and turnover means gross business income, not profit.
Do sole traders have to pay super for themselves?
No. A sole trader has no super guarantee obligation for their own income, because you are not your own employee. Voluntary personal contributions are how most sole traders keep retirement savings moving, and they may be deductible if you lodge a valid notice of intent with your fund and meet the other conditions. Staff and some contractors are different: super guarantee can apply to them.
This guide is for general information only and is not financial, tax or legal advice.