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Managing provisional tax
Learn how to manage provisional tax, including budgeting, what to watch out for in your first year of business and find out about tax pooling.
What's on this page
If you pay provisional tax, make sure you:
- Keep track of how much you need to pay and by when if you're using the standard, estimation or ratio options. If you use the accounting income method (AIM) option (available from April 2018), your accounting software will do this for you.
- Set money aside. The first instalment may have to be paid soon after you've filed your tax return.
- Have a separate bank account for your taxes. Make regular deposits so you'll be ready when payment is due.
- Let us know if you won't be able to pay in full and/or on time. Late payments can attract late payment penalties and interest.
If you use the standard, estimation or ratio option, you won't need to pay provisional tax in your first year of business, unless your residual income tax (RIT) for the previous year was more than $2,500. We recommend putting aside money for your income tax as soon as you start earning income.
If you use the AIM option (available from April 2018), you'll make smaller, regular payments of provisional tax when your business is making a profit. You'll only pay provisional tax in your first year when you make a profit.
What is residual income tax (RIT)?
Residual income tax (RIT) 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.
If you use the standard or estimation option, it's a good idea to think about voluntary payments. This will make sure your amount of tax to pay at the end of the year stays manageable. It will also help if you need to pay provisional tax for your second year in business.
If you use the AIM option, your accounting software should make sure your payments during the year are close to your RIT. Even if you have to make a top up payment at the end of the year, there's no interest or penalties.
Early payment discount
If you use the standard or estimation option, you can make voluntary payments in your first year of business. You can also qualify for an early payment discount.
The 6.7% discount is the lesser of:
- the total amount of your voluntary payments, or
- 105% of your residual income tax.
We'll deduct your early payment discount from your residual income tax.
To find out if you meet the requirements for an early payment discount go to Starting a business - budgeting for tax payments.
Example - Ashley's first year in business
For eight years, Ashley worked as a gardener for the City Council. In the 2017 tax year, she started her own landscaping business.
She got a tax refund in 2016, so she wasn’t required to pay 2017 provisional tax.
Her 2017 income tax return included the last of her salary from the City Council, and the start of her self-employed income:
|Tax on taxable income||$9,520|
|PAYE deducted from her salary||$736|
|Tax bill (residual income tax)||$8,784|
Because Ashley's tax bill was more than $2,500, she needs to pay provisional tax for the 2018 year. Using the standard option, her provisional tax is $8,417.
|28 August 2017||Provisional tax instalment 1||$2,928|
|15 January 2018||Provisional tax instalment 2||$2,928|
|7 February 2018||End-of-year tax for 2017||$8,784|
|7 May 2018||Provisional tax instalment 3||$2,928|
Ashley found these payments very hard to budget for because her business was just starting out.
If she'd made some voluntary payments of provisional tax in her first year of business, things would have been much easier.
Tax pooling allows you to pool your provisional tax payments together with other customers through a third party (a tax pooling intermediary).
If you use the AIM option you can't use tax pooling during the year. You can use it for year-end tax payments.
How tax pooling works
You send your provisional tax payments to an intermediary and the money is pooled together into a single account.
The intermediary then uses the funds in the pool to pay your provisional tax instalments to us on your behalf.
Underpayments of provisional tax are offset by any overpayments made within the pool.