Why is my first tax bill as a sole trader so big?

Nobody withheld tax from your ABN income, so a whole year of tax arrives at once when you lodge. It usually isn't extra tax, it's the tax an employee would have paid bit by bit through the year. The second shock is that PAYG instalments for the new year can start soon after, so you may need to cover last year's bill and this year's prepayments in the same few months.

The short version

Leah's tutoring added about $6,400 to her tax, which is 32c in every profit dollar, and with an instalment possibly due in the same season she may need around $8,000 in a few months.
Instalments feel painful in year two because you're paying two years at once. After that, they're simply your tax paid as you go, and the bill at tax time gets much smaller.
If the tax bill is one of several debts, the National Debt Helpline offers free, confidential financial counselling on 1800 007 007.

Written by Kitchen Table Sums. Checked against: ATO, National Debt Helpline.
Last reviewed 16 October 2026 for the 2026-27 financial year. 6 min read.

You lodged your first return with ABN income, expecting a small bill or even a refund. Then the notice of assessment arrived with a number that made you sit down.

If that's you, you're far from the only one. It's one of the most common first-year surprises, and there's a clear reason for it. Here's what happened, how to deal with it, and how to make sure next year is calmer.

Why it lands in one hit

When you're an employee, your employer takes tax out of every pay and sends it to the ATO. By tax time most of it is already paid.

ABN payments come to you whole. Nothing is withheld for income tax or the Medicare levy. So the full year's tax on your profit is worked out when you lodge, and it's all due by the date on your notice of assessment.

If you also have a job, it can feel worse. Your job has already used the tax-free threshold and the lower bracket, so most side profit is taxed at 30% plus the 2% Medicare levy, or more.

Worked example

Leah's first year tutoring on the side

Example only. Leah works in an office in Parramatta with a $70,000 taxable wage, and her employer withholds the right amount of tax. In 2025-26 she also made $20,000 profit tutoring high school maths on an ABN and saved nothing for tax. She's a full-year resident with no HELP debt.

The sums, step by step (Australian dollars)
Step	Sum	Result
Tax and Medicare on her wage alone (2025-26 rates)	$4,288 + 30% x ($70,000 minus $45,000) + 2% x $70,000	$13,188
Tax and Medicare on wage plus tutoring	$4,288 + 30% x ($90,000 minus $45,000) + 2% x $90,000	$19,588
Extra caused by tutoring, due after she lodges	$19,588 minus $13,188	$6,400
Rough guide to a quarterly instalment for 2026-27	$6,400 x 1.05 / 4	about $1,680
Cash needed for the bill and one instalment	$6,400 + $1,680	about $8,080

Leah's tutoring added about $6,400 to her tax, which is 32c in every profit dollar, and with an instalment possibly due in the same season she may need around $8,000 in a few months.

The instalment line is only a rough guide. The ATO works out the real figure from her return, and her notice shows the actual amount.

The second hit: PAYG instalments

Once your return shows business income, the ATO may put you into PAYG instalments. Individuals and sole traders go in automatically when their latest return shows instalment income of $4,000 or more, tax payable of $1,000 or more, and estimated (notional) tax of $500 or more.

Instalments are quarterly prepayments of this year's tax. They aren't a fine and they aren't extra tax. Everything you pay is credited against your tax when you lodge next year's return, and any excess is refunded.

The catch is timing. In the same season you're paying last year's bill, the first instalment for the current year can fall due. If you use the amount option, the ATO works out the figure from your latest return and lifts it for likely income growth. For 2026-27 that GDP adjustment is 5%.

Scroll for more. In words: Timeline with five points. July 2025 to June 2026, Leah earns tutoring income with nothing withheld. After lodging, a bill of about $6,400. The bill is due on the date on her notice. The next quarter, an instalment of about $1,680. At her 2026-27 return, her instalments are credited against her tax. Example only. Based on ATO 2025-26 resident rates, 2% Medicare levy and the 5% GDP adjustment for 2026-27.

Scroll for more. In words: Bar chart. 2025-26 tax bill $6,400. First instalment about $1,680. Total about $8,080. Example only. Your notice shows your actual amounts.

If you can't pay it all by the due date

Don't ignore it. The ATO's own advice is to talk to them as soon as possible.

Lodge on time anyway, so you know exactly what you owe.
Set up a payment plan through ATO online services, or phone 13 11 42 to talk it through.
Make the plan as short as you can manage.

Why short? General interest charge (GIC) builds up on any unpaid tax and compounds daily. The ATO sets the rate each quarter, so check the current rate on its website. And GIC incurred from 1 July 2025 isn't tax deductible any more, so it's a real cost with nothing back.

How to make next year calmer

Work out your set-aside percentage. For many people with a job and a side ABN it's about 32c of each profit dollar, more with a HELP debt. Our guide to putting tax aside shows the method.
Move that slice into a separate tax account every time you're paid.
Pay instalments from that account when they're due. They come off next year's bill.
If your income has dropped, you can vary your instalments, but be careful. If varied instalments end up under 85% of your actual tax, GIC can apply on the gap.
You can also make voluntary prepayments to the ATO at any time. They sit on your account and go toward your bill.

One note on the 2026-27 tax rates

The 16% bracket dropped to 15% from 1 July 2026. That helps your 2026-27 tax a little, but only on income between $18,201 and $45,000. If most of your ABN profit sits in the 30% bracket, your set-aside for that profit doesn't change.

Everyone's mix of income, deductions and offsets is different, so check with the ATO or a registered tax agent if your bill looks wrong to you.

Key numbers

The figures this guide uses, 2026-27 financial year
What	Figure and source
2025-26 resident rate, third bracket	$4,288 plus 30c for each $1 over $45,000 ATO
Medicare levy	2% ATO
16% to 15% change	15% applies from 1 July 2026 (2026-27 table) ATO
Automatic entry to PAYG instalments, instalment income	$4,000 or more ATO
Automatic entry, tax payable	$1,000 or more ATO
Automatic entry, notional tax	$500 or more ATO

Free official help

ATO if you can't lodge or pay on time (easier to read)
Plain-language steps for payment plans and contacting the ATO.
ATO newsroom on interest on tax debts
Why GIC is no longer deductible from 1 July 2025.
ATO PAYG instalments
What instalments are and how to pay or vary them.
ATO preparing for a potential tax bill
How voluntary prepayments work.
National Debt Helpline
Free, confidential financial counselling on 1800 007 007.

Questions people ask

Am I being taxed twice?

No. The bill is last year's tax, and instalments are prepayments of this year's tax that are credited when you lodge next year.

Can I get a payment plan?

Usually, yes. You can set one up in ATO online services or by phoning 13 11 42. Keep it as short as you can, because interest applies.

Is the interest on my tax debt deductible?

Not any more. GIC incurred from 1 July 2025 can't be claimed as a tax deduction.

Can I stop PAYG instalments?

You may be able to exit if you no longer earn business or investment income, with some exceptions. If your income has only dropped, varying is the usual route.

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Keep reading

How much tax should I put aside from my ABN income?
7 min read
What is a PAYG instalment notice and why did I get one?
6 min read
I have a job and an ABN. How is my side hustle taxed?
7 min read
All tax time guides

Sources

Tax rates for Australian residents (ATO). https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents, accessed 2026-10-16.
Starting PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/starting-payg-instalments, accessed 2026-10-16.
PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments, accessed 2026-10-16.
How we calculate your PAYG instalment amount or rate (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/calculate-your-payg-instalments/how-we-calculate-your-payg-instalment-amount-or-rate, accessed 2026-10-16.
How to vary your PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/how-to-vary-your-payg-instalments, accessed 2026-10-16.
Stopping PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/stopping-payg-instalments, accessed 2026-10-16.
Before interest on ATO debt costs you more (ATO small business newsroom, 5 June 2025). https://www.ato.gov.au/businesses-and-organisations/small-business-newsroom/take-control-before-interest-on-ato-debt-costs-you-more, accessed 2026-10-16.
If you can't lodge or pay on time, easier to read information (ATO). https://www.ato.gov.au/about-ato/using-our-website/easier-to-read-information/if-you-can-t-lodge-or-pay-on-time-easier-to-read-information, accessed 2026-10-16.
Preparing for a potential tax bill (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/sharing-economy-and-tax/preparing-for-a-potential-tax-bill, accessed 2026-10-16.
National Debt Helpline. https://ndh.org.au, accessed 2026-10-16.