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Provisional tax
Tāke tārewa

Understanding provisional tax

Provisional tax helps you manage your income tax. You pay it in instalments during the year instead of paying a lump sum amount at the end of the year.

Provisional tax basics

If you had more than $2,500 tax to pay at the end of the year from your last income tax return, you'll have to pay provisional tax the following year. This usually happens when you earn income without having tax deducted during the year.

Anyone who pays income tax may need to pay provisional tax including individuals, companies and trusts. Provisional taxpayers often earn:

  • self-employed income
  • rental income
  • income earned as a contractor
  • income from a partnership
  • overseas income.

Tax to pay at the end of the year is called residual income tax (RIT).  Residual income tax is the amount of income tax you pay for the year, less any PAYE and other tax credits you may be entitled to, except for Working for Families Tax Credits.

Meeting your provisional tax obligations

To help you meet your provisional tax obligations.

Calculate your provisional tax

  • Use the standard, accounting income method (AIM),estimation or ratio option to calculate your provisional tax.
  • AIM software will tell you how much to pay. As long as you pay in full and on time you won't have to pay penalties or interest.
  • If you're using another method, it's important to accurately calculate how much you need to pay to avoid penalties or interest.

Know your payment dates

Pay provisional tax on fixed dates during the year. Your payment dates will depend on:

  • your balance date (when your tax year ends) whether you're GST registered, and
  • what calculation option you choose

. Make sure you pay on time to avoid late payment penalties or interest.

Budget for provisional tax

  • Keep track of how much you need to pay and when.
  • Set money aside so you'll be ready to pay when the due date arrives
  •  If you're using AIM your payment will be based on your cashflow in the AIM period.