Provisional Tax Question Time
If you are an employee, your employer sorts out PAYE on your behalf. But when you’re self-employed, you need to pay your own income tax.
For example, if you earned $100,000 from your business, the income tax on that income would be just under $24,000. This can be a lot to pay all at once. Provisional tax breaks your income tax lump sum into installments that are paid throughout the year, smoothing out your tax burden.
How Does Provisional Tax Work?
Provisional tax splits up your income tax into payments over the year. The frequency of payments varies from as little as twice a year (28 October and 7 May) or as often as monthly. Quite often you will find people refer to provisional tax as being part of the black magic work that accountants complete.
Your due dates will depend on whether you are registered for GST and which payment option you choose. There are four payment options available:
The standard option for provisional tax is usually calculated on your previous year’s income tax, plus 5%. That number, divided by how many times each year you opt to pay, is what you’ll owe for each installment. Talk to us about the other options, and which one might be right for you.
Your provisional tax payments may not be precisely correct at the end of the tax year. You may have paid too much (if you’ve earned less than expected) or too little (if you’ve earned more). Overpayment will result in a tax refund, while underpayment will mean you still owe more to IR at the end of the year.
If you think that your income is going to be substantially more or less than last year as we may be able to estimate a more accurate figure. We can help you figure out how to determine your payment option as well as calculating your payments.
When Does Provisional Tax Kick In?
If your last total income tax for the year was below $5,000 (an income below about $34,000), you don’t need to pay provisional tax.
Once you earn enough to put you over that $5,000 threshold, you start paying provisional tax. It can be tricky in years when you move up to the provisional tax threshold, but you still owe the tax from the previous, lower-earning year. You might end up paying both provisional tax for the current year and end-of-year tax from a previous year. We can talk to you about how to manage that situation.
Do I Pay Provisional Tax In My First Year Of Business?
If you make a net profit in your first year, you'll need to pay tax on this. However as a new business there is requirement to physically pay provisional tax to Inland Revenue. However you need to start saving for tax and we recommend have a second bank account where you can save for future taxes.
Making voluntary payments or putting money aside during your first year can ease your cash flow for your second year. In your second year you may have to pay end-of-year tax for your first year, on top of provisional tax instalments for your second year. This means you could have 2 years of tax in less than a twelve month period.
How Do I Know What My Provisional Tax Is?
When we prepare your income tax return we will produce an income tax report for you. On the first page of this report is a payments table. This table shows what provisional tax you will be paying and also when it is due for payment.
If you are a client of Whutuporo Limited approximately 3 - 4 weeks prior to the provisional tax payment date you will receive an email from our Tax Manager with a letter detailing the tax that is due and the payment due date. If your circumstances are very different to the current method of provisional tax you should get in contact with our Tax Manager to discuss it further.
How Often Do I Pay My Provisional Tax?
The number of instalments you'll have is based on your GST registration and how often you file GST returns.
For example, if you earned $100,000 from your business, the income tax on that income would be just under $24,000. This can be a lot to pay all at once. Provisional tax breaks your income tax lump sum into installments that are paid throughout the year, smoothing out your tax burden.
How Does Provisional Tax Work?
Provisional tax splits up your income tax into payments over the year. The frequency of payments varies from as little as twice a year (28 October and 7 May) or as often as monthly. Quite often you will find people refer to provisional tax as being part of the black magic work that accountants complete.
Your due dates will depend on whether you are registered for GST and which payment option you choose. There are four payment options available:
- The standard option
- The estimation option
- The ratio option
- The accounting income method (AIM).
The standard option for provisional tax is usually calculated on your previous year’s income tax, plus 5%. That number, divided by how many times each year you opt to pay, is what you’ll owe for each installment. Talk to us about the other options, and which one might be right for you.
Your provisional tax payments may not be precisely correct at the end of the tax year. You may have paid too much (if you’ve earned less than expected) or too little (if you’ve earned more). Overpayment will result in a tax refund, while underpayment will mean you still owe more to IR at the end of the year.
If you think that your income is going to be substantially more or less than last year as we may be able to estimate a more accurate figure. We can help you figure out how to determine your payment option as well as calculating your payments.
When Does Provisional Tax Kick In?
If your last total income tax for the year was below $5,000 (an income below about $34,000), you don’t need to pay provisional tax.
Once you earn enough to put you over that $5,000 threshold, you start paying provisional tax. It can be tricky in years when you move up to the provisional tax threshold, but you still owe the tax from the previous, lower-earning year. You might end up paying both provisional tax for the current year and end-of-year tax from a previous year. We can talk to you about how to manage that situation.
Do I Pay Provisional Tax In My First Year Of Business?
If you make a net profit in your first year, you'll need to pay tax on this. However as a new business there is requirement to physically pay provisional tax to Inland Revenue. However you need to start saving for tax and we recommend have a second bank account where you can save for future taxes.
Making voluntary payments or putting money aside during your first year can ease your cash flow for your second year. In your second year you may have to pay end-of-year tax for your first year, on top of provisional tax instalments for your second year. This means you could have 2 years of tax in less than a twelve month period.
How Do I Know What My Provisional Tax Is?
When we prepare your income tax return we will produce an income tax report for you. On the first page of this report is a payments table. This table shows what provisional tax you will be paying and also when it is due for payment.
If you are a client of Whutuporo Limited approximately 3 - 4 weeks prior to the provisional tax payment date you will receive an email from our Tax Manager with a letter detailing the tax that is due and the payment due date. If your circumstances are very different to the current method of provisional tax you should get in contact with our Tax Manager to discuss it further.
How Often Do I Pay My Provisional Tax?
The number of instalments you'll have is based on your GST registration and how often you file GST returns.
GST Registration |
Number of Instalments |
Not Registered For GST |
3 |
Monthly or Two-Monthly Filing |
3 |
Six Monthly Filing |
2 |
Using The Ratio Option |
6 |
AIM |
Up to 12 |
When Do I Pay My Provisional Tax?
When your payments are due depends on your balance date - the last day of your income year. The following table shows when your payments are due based on the standard balance date of 31 March.
When your payments are due depends on your balance date - the last day of your income year. The following table shows when your payments are due based on the standard balance date of 31 March.
Number of Instalments |
Payments Due |
2 |
28 October and 7 May |
3 |
28 August, 15 January and 7 May |
6 |
28 June, 28 August, 28 October, 15 January, 28 February and 7 May |
12 |
15 January, 28 January, 28 February, 28 March, 7 May, 28 May, 28 June, 30 July, 28 August, 28 September, 28 October, 28 November |
How Do I Pay My Provisional Tax?
You can make payments by:
When making a payment, include:
You can make payments by:
- direct debit in myIR;
- credit or debit card at ird.govt.nz/pay; or
- internet banking - most New Zealand banks have a pay tax option
When making a payment, include:
- your IRD number;
- the account type you are paying; and
- the period the payment relates to.
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