If you are new to business, provisional tax can feel like a surprise bill for income you have not earned yet. It is really an instalment system: you pay income tax during the year instead of waiting for one large payment after the year has finished. This guide explains the basic New Zealand rules and the practical habits that make the bill easier to manage.
When does provisional tax start?
You will generally need to pay provisional tax when the residual income tax (RIT) from your last income-tax return is more than $5,000. RIT is broadly the tax still owing after tax already paid at source, such as PAYE or withholding tax.
For a new sole trader or contractor, the first year can be different because there may not be a previous business return to use. Keep the first year’s profit visible, then ask what the next return could mean for provisional tax. Do not wait for an assessment to start putting money aside.
How are the instalments worked out?
Most small businesses use the **standard method**. You pay your last year's residual income tax plus 5%, split into three instalments. If last year's return hasn't been filed yet when the first instalments fall due, the base is the year before that plus 10%.
For a 31 March balance date, the three standard instalments are due on **28 August, 15 January and 7 May**. If you file GST six-monthly, you pay in two instalments instead; if you use the ratio method, payments line up with your two-monthly GST returns.
The other options are the **estimation method**, where you estimate this year's tax yourself (useful when income has dropped, but interest applies if the estimate turns out too low), and **AIM**, which works out payments from your Xero figures each GST period. AIM suits businesses with uneven income through the year.
Why the standard method is often the safest start
If your residual income tax is under $60,000 and you pay the standard instalments on time, IRD doesn't charge use-of-money interest before the final instalment date, even if the business has a much better year. That protection is the main reason we start most new clients on the standard method.
Always check the exact amounts and dates in myIR. They can shift if you're with a tax agent, have a non-standard balance date, or your GST filing frequency changes.
A simple cash plan for a new business
Open a separate tax savings account and transfer money whenever customers pay you. Work from expected taxable profit, not just total sales, and keep GST separate if you are GST-registered. A cash target should allow for:
- income tax and provisional tax
- GST collected on behalf of Inland Revenue
- ACC invoices when they arrive
- payroll deductions if you employ people
Review the target whenever sales, margin or drawings change. A quick monthly check is usually more useful than trying to predict the whole year perfectly.
What if profit is lower this year?
Do not simply stop paying. Update the forecast, check whether an estimate is appropriate and discuss the position before a payment date passes. A lower profit may reduce the eventual tax, but the right treatment depends on what has already been filed and paid.
Practical checklist
- Find last year’s assessment and RIT in myIR.
- Mark every provisional-tax payment date in your calendar.
- Keep a running year-to-date profit figure.
- Move tax money into a separate account as cash arrives.
- Revisit the estimate when revenue or profit changes materially.