A practical Australian method for separating income tax, PAYG instalments and GST so freelance hairdressers can price and manage cash without using a false rule of thumb.
Abby's take
What this means for the industry — and for independents
Industry impact. Independent service businesses collect client money before all tax obligations are visible. When GST, income tax and personal cash are mixed in one account, a strong booking month can create a misleading sense of available money and a later cash-flow shock.
For freelancers. A freelance hairdresser needs a system that responds to product, workspace and operating costs as well as other personal income. A flat percentage of sales can overfund or underfund tax because sales are not the same as taxable profit and GST collected is not business income to spend.
My take. I would rather see a freelancer transfer a reviewed amount every week and reconcile it regularly than rely on a percentage copied from somebody else's business. The habit matters, but the estimate still has to come from your profit, structure, GST position and total income.
What I'd do next
- Forecast annual sales and deductible business costs to estimate taxable profit, then include other income and personal circumstances with a registered tax agent.
- Keep GST separate from the income-tax estimate and transfer collected GST to a dedicated account if the business is registered.
- Convert the reviewed annual income-tax estimate into a transfer per pay cycle or week and account for PAYG instalments already being prepaid.
- Reconcile actual profit, GST and ATO instalments monthly or quarterly and update the transfer when prices, bookings, costs or other income change.
Watch-out. This is general cash-flow information, not personal tax or financial advice. Deductions, offsets, Medicare levy, study loans, other income, residency, structure and GST status can materially change the result. Use a registered tax agent for an individual estimate.
Why a percentage of every client payment can be wrong
Client takings are not the same as taxable income. A sole trader generally works out business profit after allowable deductions, then reports that profit with other income in the individual tax return. Product, workspace, software, insurance and other deductible costs can change the profit even when sales stay the same.
Personal circumstances matter too. Employment income, investment income, tax offsets, the Medicare levy, study-loan repayments and residency can change the final bill. A stylist earning the same business sales as another stylist can need a different tax reserve, so a universal percentage creates false confidence.
Confirm whether the sole-trader model matches your structure
Start with taxable profit, not bank deposits
Build a twelve-month forecast with service sales, retail margin and other business income on one side, then realistic deductible costs on the other. Use amounts excluding GST where appropriate so the forecast does not treat tax collected for the ATO as operating revenue. The remaining business profit is the starting point, not automatically the final taxable income.
Add expected income outside the business and take the complete forecast to a registered tax agent. Ask for an estimated annual income-tax position and the assumptions behind it. Divide the reviewed reserve across your normal transfer cycle, but keep a buffer because a forecast will not land perfectly.
Understand the 2026–27 resident tax brackets
For Australian residents in 2026–27, the ATO lists no income tax up to $18,200, then 15 cents per dollar from $18,201 to $45,000, 30 cents from $45,001 to $135,000, 37 cents from $135,001 to $190,000 and 45 cents above $190,000. The published table excludes the Medicare levy.
These are marginal brackets. Moving into a higher bracket does not apply the higher rate to every dollar earned. The table is useful for understanding the estimate, but it is not enough to calculate your reserve without considering deductions, other income and personal adjustments.
Keep GST in a different bucket
If the business is GST-registered, GST collected from clients should not be treated as spendable profit. The ATO's guidance updated 14 September 2026 says most small businesses remit the difference between GST collected and eligible GST credits, commonly through a quarterly business activity statement.
Where most sales and purchases are taxable, the ATO describes a rough cash-flow method as one-eleventh of sales minus one-eleventh of purchases, subject to eligibility and correct records. Actual treatment depends on taxable, GST-free and input-taxed transactions and the accounting method used. Keep the GST reserve separate from the income-tax reserve.
Review whether early GST registration makes commercial sense
Use PAYG instalments as prepayments, not an extra tax
The ATO updated its PAYG instalment guidance on 3 September 2026. PAYG instalments are progressive prepayments toward tax on business and investment income, designed to reduce the risk of a large bill after the return is lodged. They are credited against the final liability rather than added on top of it.
The ATO may enter a taxpayer into the system after a return or an eligible person can request voluntary entry. For 2026–27, the ATO says the GDP adjustment factor applied to the amount method is 5 per cent. Review an instalment notice against the current forecast and seek advice before varying it, because an unreasonable variation can have consequences.
Create a weekly transfer and a quarterly reconciliation
Use separate bank buckets for operating money, GST where applicable, income tax and an intentional personal payment. Each week, record sales and costs, then transfer the GST amount and the adviser-reviewed income-tax reserve. Do not reduce the reserve simply because the operating account feels tight; investigate pricing, costs or drawings instead.
At least quarterly, compare actual year-to-date profit with the forecast, subtract PAYG instalments already paid and review the remaining reserve. Update the weekly transfer after a material price rise, roster change, expense shift or new source of income. The system should follow the business rather than remain frozen at launch.
Do not quietly spend the retirement or tax buckets
A sole trader generally does not pay super guarantee to themselves, but can make personal super contributions. That retirement decision is separate from GST and income-tax cash. If every reserve sits in one balance, it is easy to spend money that already has a future purpose.
Name the accounts clearly and automate transfers after client payments settle. Review access so the tax account is not used for routine purchases. If the numbers show the business cannot cover normal costs, personal needs and required reserves, solve that through price, capacity, service mix or cost decisions rather than borrowing from the next tax deadline.
Check whether service prices support the complete business · Review the wider business system
Make the reserve part of every profitable service
Build sales, costs and realistic capacity into one forecast, then use professional tax advice to turn the annual estimate into a repeatable weekly habit.
Build the numbersDisclaimer: General Australian business information only, current to 23 September 2026. It is not tax, legal or financial advice. Tax rates, PAYG settings and GST treatment can change; check current ATO guidance and obtain advice from a registered tax agent.
Common questions
What percentage should a freelance hairdresser save for tax?
There is no reliable universal percentage. Estimate taxable profit, include other personal income and adjustments, obtain an adviser-reviewed annual estimate, account for PAYG instalments and convert the remaining reserve into a regular transfer.
Should I calculate tax from sales or profit?
Income tax for a sole trader is generally based on taxable profit and the individual's wider tax position, not gross client payments. GST, if registered, is calculated and reserved separately.
Is PAYG instalment tax additional to my annual income tax?
No. PAYG instalments are prepayments toward the expected tax on business and investment income. Amounts paid are credited when the tax return determines the final liability.
How often should I review the tax amount I set aside?
Transfer consistently each week or pay cycle and reconcile at least quarterly. Review sooner after a material change to prices, bookings, costs, employment income, structure, GST status or PAYG instalments.
Next step at The Beauty Basement
A tax reserve is a system, not a guess
When every client payment has a clear job, independence becomes easier to manage. Forecast honestly, separate the buckets and review the amount as the business changes.
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