Provisional tax in NZ: who pays it, the four methods and the dates

Provisional tax is the reason many small business owners feel they’re always paying tax. Instead of one bill at the end of the year, income tax is spread across instalments during the year. Done well, it smooths things out. Done badly, or misunderstood, it’s one of the most common routes into IRD debt.

What is provisional tax?

It’s income tax paid in instalments during the year you earn the income, rather than in one lump after the year ends. Whatever’s left once the year’s return is filed is paid as terminal tax.

You generally need to pay provisional tax once your residual income tax (the income tax left to pay after credits) for the previous year is more than $5,000. Below that, you make one payment at the end of the year (business.govt.nz).

Why does the second year of trading hurt?

Business.govt.nz notes that provisional tax “often applies to businesses in their second year of trading”. In year one, you usually don’t pay any. In year two, the terminal tax for year one falls due and provisional instalments for year two begin. If year one was profitable, that’s two sizeable bills close together. Our page on provisional and terminal tax funding looks at ways through that crunch.

What are the four methods?

Method	How the amount is set	Payments (31 March balance date)	Good for
Standard	Last year’s residual income tax plus 5% (or two years ago plus 10%)	Three: August, January, May	Stable profits
Estimation	Your own estimate of this year’s tax	Three: August, January, May	Profit expected to fall
Ratio	A percentage of your GST taxable supplies	Six, aligned with GST	GST-registered, two-monthly filers with steady margins
AIM	Calculated from your accounting software as you go	Monthly or two-monthly	Uneven or seasonal income

(Based on business.govt.nz.) Eligibility rules apply to ratio and AIM, so check with your accountant.

What are the dates for a 31 March balance date?

Under the standard and estimation methods, instalments are usually due:

• 28 August
• 15 January
• 7 May

If a date falls on a weekend or public holiday, it moves to the next working day. Our tax due-date timeline lays out your next 12 months of provisional, terminal, GST and PAYE dates together.

Instalment due and the money isn’t there? See whether funding can cover it on time. No credit check to enquire.

How does use-of-money interest apply?

It depends on the method and on how much tax you owe. IRD says that under the standard method, if your residual income tax is under $60,000, interest generally starts running the day after the end-of-year (terminal tax) due date; if it’s $60,000 or more, interest runs from the day after the final instalment date. Under the estimation method, interest is worked out on the difference between what you paid and your actual tax, from each instalment date (IRD). Our UOMI page explains how interest works more broadly.

What penalties apply to late provisional tax?

IRD adds 1% the day after a missed instalment date, then another 4% if the amount is still unpaid a week later. The monthly 1% penalty doesn’t apply to income tax, including provisional tax (IRD). Interest may also apply as above.

How can you plan provisional tax better?

1. Pick the right method. If profit swings, AIM or ratio may match payments to income better than standard.
2. Re-estimate mid-year if profit is clearly going to be much higher or lower than last year (with care; estimates carry interest consequences).
3. Set aside tax as you earn, in a separate account.
4. Consider tax pooling for timing flexibility on income tax.
5. Talk to IRD or a funder before a missed instalment, not after.

An illustrative example

Illustrative only. Not a real client and not an offer.

A Nelson landscaping business had a strong first year, then a wet winter in its second. On the standard method, its provisional instalments were set from the strong year, and the August instalment of $22,000 arrived when the bank held $9,000. Its accountant re-estimated the year’s tax with care, which reduced the January and May instalments, and a short cash-flow loan covered the August shortfall so no penalties were charged.

What is residual income tax?

It’s the income tax you have to pay for the year after taking off certain credits, such as tax already deducted at source. It’s the figure that decides whether you’re in provisional tax at all (the $5,000 line) and, under the standard method, how big next year’s instalments will be. Your accountant can tell you your residual income tax from your last return. If you don’t know it, that’s worth finding out before the next instalment date.

What if this year is going much worse than last year?

Under the standard method, your instalments are based on last year’s tax, not this year’s profit. If trading has dropped sharply, you may be paying more provisional tax than you’ll end up owing. The estimation method lets you base instalments on an honest estimate of this year instead, but it carries interest consequences if the estimate turns out too low, so it needs care. Talk to your accountant before switching. Overpaid provisional tax can be refunded or transferred after the return is filed, but that doesn’t help cash flow today.

Don’t let an instalment become a debt

If a provisional tax payment is coming up and you can’t cover it, send us a quick enquiry. We won’t check your credit just because you’ve asked, your details aren’t sprayed around other lenders, and a real person will call you back. Tell us the amount, the due date and how your income looks this year, as accurately as you can.