Running a small business in New Zealand means managing your cash flow, staying compliant, and keeping on top of your IRD obligations. One of the biggest responsibilities for Kiwi business owners is understanding Provisional Tax — what it is, when you need to pay it, and how to calculate it correctly.
Here’s a simple, practical guide to help you stay compliant and avoid unexpected tax bills.
What is Provisional Tax?
Provisional Tax is not an extra tax. It is simply a way of paying your Income Tax in advance, in instalments throughout the year. You must pay Provisional Tax when your Residual Income Tax (RIT) from the previous year is more than $5,000.
This applies to:
Sole Traders
Contractors
Freelancers
Companies
Anyone earning untaxed income (e.g., rental income or self-employed income)
If your RIT is less than $5,000, you normally pay your tax once at the end of the year.
How Provisional Tax is calculated?
The IRD allows several methods to calculate how much provisional tax you need to pay. It depends on how your business earns and spends money.
1. Standard method
Your provisional tax is based on last year’s tax bill.
If last year’s return is filed → 105% of last year’s RIT
If not yet filed → 110% of the RIT from two years ago
This works well if your income is stable.
2. Estimation method
You estimate your income for the year and pay provisional tax based on that amount.
Use this if:
Your income is dropping
You expect slower business
You want to avoid overpaying
Be careful, if you underestimate, IRD may charge interest.
3. GST ratio method
Applies if you’re GST-registered. Provisional tax is calculated based on your GST-return figures. This method suits businesses with seasonal or fluctuating income.
4. Accounting Income Method (AIM)
AIM is ideal for small businesses using approved accounting software.
You pay tax as you earn, based on real-time profit.
Best for:
Small businesses with turnover under $5M
Start-ups
Those wanting easier cash-flow management
Provisional Tax Payment Dates
If you use the Standard, Estimation, or GST Ratio method and have a 31 March balance date, your instalments are generally due:
28 August
15 January
7 May
What happens if you don’t pay or underpay
If you miss a provisional tax payment, IRD may charge:
Use-of-Money Interest (UOMI)
Late payment penalties
However, many small businesses qualify for the safe harbour rule, meaning UOMI may not apply if:
Your RIT is under $60,000, and
You paid your instalments on time using the Standard method
FAQs
Can I choose which provisional tax method to use?
Yes. Choosing the right method depends on your business.Do I need an Accountant for provisional tax?
Although not mandatory, working with a tax agent or Accountant can help you select the most suitable method for your business, avoid penalties and interest, and maintain accurate records while streamlining your cash flow.Can first-year businesses pay provisional tax?
New businesses are not automatically required to pay provisional tax in their first year.
At CB Solutions, we support Kiwi business owners in managing their finances with ease. From Provisional Tax and GST to Bookkeeping and IRD compliance, we provide expert guidance tailored to your needs. Whether you’re a Sole Trader, Contractor, or Company, we’re here to help you navigate every step of the way.
Get in touch with us today and make tax time stress-free.
