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?
The amount and number of payments depend on your balance date, previous tax result and the method used. Common approaches use the previous year’s tax with an uplift, an earlier year’s result or an estimate of the current year’s profit. The estimate method can be useful when income has changed, but it needs realistic numbers because underestimating can create use-of-money interest.
Check the actual dates and balances in myIR. The dates can be affected by your balance date, GST filing cycle and whether a tax agent extension applies. Treat the dates in myIR as the source of truth rather than copying a date from another business.
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.
Rules, thresholds and payment dates can change. This is general information, not tax advice; check your position with Inland Revenue or a qualified adviser.
Make the next step practical
Use the ideas here as a starting point for a better conversation. The right answer depends on your records, timing and circumstances, so keep the assumptions visible and revisit them when something changes.