Provisional tax often trips Kiwi business owners up in the first few years of business. Early on, you may only need to pay terminal tax after the year ends. Once your tax bill crosses the threshold, the timing changes. You can end up paying terminal tax for the prior year and provisional tax for the current year at the same time. Without planning, that overlap can hit cashflow hard.
If you’re self-employed, run a small business, earn non-PAYE income, or own rental property, provisional tax usually applies once your tax bill exceeds $5,000. This guide explains how provisional tax works, when it starts, how it’s calculated, and what you should be doing early to manage cashflow.
What’s Covered in This Guide
What is Provisional Tax?
Provisional tax is income tax you pay in instalments during the year.
Everyone pays income tax if they earn income. Self employed people, rental property owners and people who earn non-PAYE income need to pay their own income tax.
You pay provisional tax if your tax bill for the last tax year is more than $5,000 (previously $2,500).
Key Provisional Tax Dates
Provisional tax in New Zealand is usually paid in three instalments each year. The standard dates are:
- 1st instalment: 28 August
- 2nd instalment: 15 January
- 3rd instalment: 7 May
These dates apply for most businesses, but your exact due dates and amounts may vary. Always check your myIR account to confirm what you owe before making a payment.
Your First Year in Business
When you start a business in New Zealand, you usually don’t pay provisional tax or terminal tax straight away (unless your profit will be over $208,000 in the first year – then different rules kick in).
Here’s how it works:
If your first financial year ends 31 March 2026, you:
- Finalise your accounts after that date.
- Lodge your return and pay any income tax by 7 April 2027 (or 7 February 2027 if you don’t use a tax agent)
That means you can trade up to 24 months before you actually pay your first year’s tax. That tax is called terminal tax.
For your second year (e.g., 1 April 2026 – 31 March 2027):
- If your first terminal tax bill is more than $5,000, you have to pay provisional tax, starting in August 2026.
- Provisional tax means you pay income tax during your second year, not a year later. It’s like paying as you go.
Many new business owners get caught out because they don’t set aside money for tax as they go. When terminal tax is due at the same time as provisional tax, cashflow can take a hit. This often pushes businesses into a catch-up cycle that’s hard to break and adds unnecessary stress.
How Provisional Tax is Calculated
There are 3 different methods to calculate your provisional tax. The standard method is the most common and is the default option:
The standard option:
Inland Revenue take the terminal tax figure from the last year and add 5% to it – this is your provisional tax amount to pay – and is usually due in 3 instalments during the year.
If you are a sole trader, and file your GST returns each 6 months, you will pay in 2 instalments per year which aligns with your GST payment dates.
When your financial accounts and tax returns are prepared – all that provisional tax you’ve paid will be sitting as a credit against your name to offset your final tax bill for the year. Any overpayment will be refunded to you, any underpayment will become your terminal tax and will be payable by 7 April 2022.
Example:
Untaxed income 2024-2025 financial year: $40,000
2024-2025 financial year total income tax bill: $6,020
Because the tax bill is over $5,000 provisional tax is due for the next year
Provisional tax for 2026 financial year (2025-2026): $6,020 + 5% = $6,321 for the year
Split into 3 instalments:
- $2,107 – due 28 August 2022
- $2,107 – due 15 January 2023
- $2,107 – due 7 May 2023
The AIM and ratio options:
Both options are based on your GST results, rather than your previous year’s income tax returns. This can involve quite a lot of extra work throughout the year but more accurate amounts to pay, based on the year-to-date activity. The AIM option requires you to have an AIM-capable accounting software.
Managing Your Provisional Tax
To reduce stress and avoid late fees:
- Set up a separate tax savings account and put money aside regularly.
- Check your myIR account before each payment to confirm amounts.
- Keep a record of all payments and confirmations.
- Be aware of warning signs like sudden income changes or difficulty meeting payment dates.
If you’re unsure about amounts or timing, a Kiwitax accountant can provide advice tailored to your situation. You can also sign up for our Provisional Tax Checks service, which calculates your payment figures based on year-to-date trading, helping you avoid under- or over-paying tax.
Feeling confused by provisional tax? We’d love to help.
About Kiwitax – Award winning business improvement, tax and accounting service
Here’s the thing. As a business, rental property owner or start-up, you get a kick out of having your own gig. But chances are dealing with your tax and accounting leaves you cold. Good news! We love it, so hand it over to Kiwitax and we’ll look after it all for you.
Whether you deal with us online, by phone or drop into our Napier office, you’ll find a friendly, professional hardworking team ready to work with you, however you keep track of your financial information and from wherever you do business. And all for a fixed price. It takes just two minutes to get a quote.
Plus if you’re at a loss to know how to improve aspects of your business – from growth planning to cashflow management, even tax debt and so much more – we’re all over that too. Our Business Improvement advisors can help you make a plan and put it into action.
If you liked this article and want to make improvements in your business, with quarterly coaching sessions specifically tailored to support you to identify and achieve your business goals, lets chat!