If you are employed, your employer deducts income tax from your regular pay and pays it to the IRD.
But if you get your income from other sources such as self-employment, rental income or shareholder income, then you need to pay your income tax to the IRD in other ways.
Generally, after your first year in business, your accountant will finalise your accounts and determine your tax position. If your business has made a profit you will have income tax to pay on that profit. This is also called terminal tax or residual income tax. You have until the end of the following financial year to pay it.
Provisional tax can come into play at this point because if you have more than $2,500 in residual income tax to pay, you will have to start paying provisional tax. Provisional tax is income tax paid in advance of the end of the financial year, or paid as you go (not in arrears).
As a default, provisional tax is generally calculated at 105% of last year’s end-of-year tax (standard option) and usually paid in three instalments over the year (28 August, 15 January, and 7 May).
Talk to us if you think that your income is going to be substantially more or less than last year and we can help estimate a more accurate figure.
Other ways to pay provisional tax are by using the ratio option, where you pay a percentage of your GST return - this can be good for people with fluctuating or seasonal income - or by the AIM (Accounting Income) option, which uses your accounting software to calculate your provisional tax based on your profit (or loss) for the period. You generally pay in line with your GST periods for both of these methods.
It’s important to get provisional tax right. If you under pay or don’t pay on time, the IRD may charge you interest.
Get in touch to make sure you’re paying the correct amount, or to see if there’s a better option for paying provisional tax.