If you’re self-employed or running a small business in New Zealand, there’s a good chance the words provisional tax make your palms a bit sweaty. Don’t worry, you’re not alone.
The Inland Revenue (IRD) doesn’t exactly roll out a red carpet when it comes to explaining your tax obligation either. Between residual income tax, accounting income, and whether your income level crosses the payment threshold—it’s enough to make anyone want to go off-grid.
But here’s the deal: if you owe more than $5,000 in residual income tax after your tax return, you might need to pay provisional tax the following tax year. That usually means splitting your tax bill into instalments rather than getting smashed with a big one later (terminal tax, anyone?).
Still with me? Good. Whether you’re on PAYE, registered for GST, or just trying to stay on top of your tax liability, getting this stuff right matters.
So grab your IRD number, circle your due dates, and let’s unpack what all of this means—without the boring bits.
Provisional Tax threshold in New Zealand: an overview
What is Provisional Tax and why does the threshold matter?
Provisional tax is basically a way to pay your income tax in advance across the tax year, rather than waiting until the end and getting hit with one big tax bill. It’s mostly aimed at people who don’t have tax deducted at the source—think self-employed individuals or small business owners—not your typical PAYE earners.
Now, here’s where the threshold kicks in. If your residual income tax (that’s the tax you owe after subtracting any tax already paid, like withholding tax or RWT) is more than $5,000 at the end of the year, the IRD expects you to start paying provisional tax the following year.
In other words, cross that payment threshold, and you’re into the world of instalments, due dates, and keeping the IRD happy before your final tax return is even filed.
It might sound like a hassle, but it’s all about spreading your tax obligation over time—so you’re not caught short when terminal tax rolls around. Understanding this threshold can save you from a nasty surprise… and a stressed-out accountant.
Do you know : According to the Treasury’s Financial Statements of the Government for the year ended June 30, 2024, total tax revenue was $NZ 119.8 billion, with individual income tax contributing $NZ 52.8 billion (44%) and corporate income tax $NZ 20.5 billion (17%). Provisional tax, paid by self-employed individuals and businesses, is a subset of these, likely accounting for 20–30% of individual income tax ($10–15 billion) and a majority of corporate tax, given most companies with RIT over $5,000 pay provisionally.
Who needs to pay Provisional Tax in NZ?
Residual Income Tax (RIT) and Income Eligibility
So, who actually has to pay provisional tax? It all starts with something called residual income tax (RIT).
This is the amount of income tax you owe after subtracting any tax you’ve already paid during the year (like PAYE or RWT). It’s basically what’s left on your tax bill after the IRD’s had its first crack.
How is RIT calculated?
Here’s the basic formula:
Tax on taxable income – tax already paid (e.g. PAYE, RWT, etc.) = Residual Income Tax (RIT)
If your RIT is $5,000 or more after filing your tax return, the IRD expects you to pay provisional tax in the following tax year. Prior to the 2020 tax year, this threshold was $2,500, but it was increased to $5,000 in response to COVID-19 to reduce compliance costs for smaller taxpayers and allow them to retain cash longer.
Example:
Let’s say you’re a self-employed graphic designer earning $75,000 a year. You haven’t paid any tax throughout the year (no PAYE). At the end of the tax year:
- Tax on $75,000 = $15,670
- Tax paid = $0
- Residual Income Tax = $15,670
Since your RIT is over $5,000, you’ll be expected to pay provisional tax next year—split into instalments on set due dates.
Provisional Tax on rental income and other common scenarios
Own a rental property? You’re not off the hook.
Landlords who earn rental income and have to file an IR3 tax return (because they’re not on PAYE) often end up with RIT above the threshold. That means: yes, you might need to pay provisional tax too.
Common scenarios where provisional tax applies:
- Self-employed contractors/freelancers
- Side hustles earning above $5,000 profit
- Sole traders
- Landlords with profitable rental properties
- Small businesses without PAYE withholding
If your rental or business income pushes you above the $5,000 RIT payment threshold, you’ll be expected to pay in advance the following year.
Meet Sarah, a Landlord in Auckland
Sarah owns a rental property in Auckland that she’s been leasing out since 2022. She’s not on PAYE (Pay As You Earn) for this income because it’s not salary or wages—rental income is untaxed at source, so she files an IR3 tax return annually. Let’s see how provisional tax kicks in for her based on her 2024/25 tax year (ending March 31, 2025).
Step 1: Sarah’s Rental Income and Tax for 2023/24
- Rental Income: Sarah’s tenants pay $600/week ($31,200/year).
- Expenses: She deducts allowable costs like mortgage interest ($10,000), repairs ($2,000), rates ($3,000), and insurance ($1,200), totaling $16,200.
- Taxable Profit: $31,200 – $16,200 = $15,000.
- Residual Income Tax (RIT): At the individual tax rates (assuming no other income for simplicity):
- $0–$14,000 at 10.5% = $1,470
- $14,001–$15,000 at 17.5% = $175
- Total RIT = $1,470 + $175 = $1,645.
For 2023/24, her RIT is $1,645, below the $5,000 threshold. She pays this as terminal tax by April 7, 2025 (with a tax agent), and doesn’t owe provisional tax for 2024/25 yet—new landlords often dodge it in year one because prior-year RIT starts at zero.
Step 2: Growth in 2024/25 Triggers Provisional Tax
In 2024/25, Sarah raises the rent to $650/week ($33,800/year) due to market demand, and her expenses stay roughly the same ($16,200).
- Taxable Profit: $33,800 – $16,200 = $17,600.
- RIT:
- $0–$14,000 at 10.5% = $1,470
- $14,001–$17,600 at 17.5% = $630
- Total RIT = $1,470 + $630 = $2,100.
Still under $5,000, so no provisional tax for 2025/26 yet. But let’s say Sarah buys a second rental property mid-year, boosting her total rental income.
- New Scenario: Two properties bring in $65,000/year combined, with expenses of $30,000.
- Taxable Profit: $65,000 – $30,000 = $35,000.
- RIT:
- $0–$14,000 at 10.5% = $1,470
- $14,001–$35,000 at 17.5% = $3,675
- Total RIT = $1,470 + $3,675 = $5,145.
Now her 2024/25 RIT exceeds $5,000, crossing the threshold. She pays $5,145 as terminal tax by April 7, 2026, but this triggers provisional tax for the next year (2025/26).
Step 3: Provisional Tax for 2025/26
Using the standard option (most common, ~70–80% of taxpayers):
- Calculation: 105% of 2024/25 RIT = 105% × $5,145 = $5,402 (rounded).
- Instalments (March 31 balance date):
- August 28, 2025: $1,800
- January 15, 2026: $1,801
- May 7, 2026: $1,801
- Total Provisional Tax: $5,402, paid in three chunks to spread the burden.
Provisional Tax in your first year of business
Here’s the trap: you don’t pay provisional tax in your first year of business.
BUT… the following year, the IRD looks at your residual income tax and—if it’s over $5,000—bam, you owe for last year and have to start paying for this year in instalments. Ouch.
This is called the “second-year tax trap.”
How to prepare:
- Set aside around 30–35% of your income to cover income tax and GST (if registered)
- Use accounting tools or a spreadsheet to track income and calculate an estimate
- Talk to a tax agent early if you’re unsure about your obligations
Even if the IRD hasn’t sent you a bill yet, being proactive will help you avoid a painful cashflow crunch when those due dates hit.
Understanding the main Provisional Tax methods
When it comes to paying provisional tax in New Zealand, there’s more than one way to do it. The IRD offers a few different methods, each with its own pros, cons, and ideal use cases. Choosing the right one can make a big difference to your cashflow, accuracy, and stress levels.
Let’s break down the four main methods, so you don’t have to Google it in panic the night before your first instalment is due.
Standard Uplift Method
This is the most common method used—and probably the one the IRD will default you to if you don’t choose something else.
What is it?
The standard uplift method calculates your provisional tax based on a percentage of your previous year’s residual income tax (RIT):
- 100% of last year’s RIT if your return is filed
- 105% of the year before that if your return isn’t filed yet
Why use it?
- It’s simple and predictable
- No need to estimate this year’s income
- Great for businesses with consistent earnings
But if your income’s going to drop significantly, this method might have you overpaying. Fun.
Estimation Method
Feeling confident about your income level this year? You can use the estimation method to pay tax based on what you actually expect to earn.
When to use it:
- Your income will be much lower this year
- You want to avoid overpaying tax
Watch out:
- If you underestimate and don’t pay enough, the IRD may charge interest and penalties
- You’ll need to be on top of your numbers
Not ideal if you’re guessing or just hoping for a quiet income year.
Ratio Method
This one’s for GST-registered businesses that file monthly or two-monthly GST returns.
How it works:
You pay provisional tax as a percentage (ratio) of your accounting income (your sales/turnover), calculated from your recent income tax return.
The IRD gives you your ratio and you apply it each GST filing period.
Who benefits:
- Businesses with seasonal or fluctuating income
- Those wanting to align tax payments more closely with cashflow
It’s not for everyone—but if your income bounces around month to month, this method keeps payments in sync with your actual earnings.
Accounting Income Method (AIM)
Say hello to the tech-friendly option. The AIM method uses accounting software to calculate your provisional tax automatically, based on real-time profits.
Why it rocks:
- No need to guess or estimate
- Tax is calculated every two months based on actual performance
- If you make a loss, you don’t pay provisional tax
- Refunds can be processed quickly
What you’ll need:
- IRD-approved accounting software (like Xero or MYOB)
- Consistent bookkeeping
- To opt in at the beginning of the tax year
AIM is ideal for small businesses, startups, or anyone who hates surprises. It does require clean, up-to-date financial records—but that should be a given anyway, right?
When are Provisional Tax payments due?
Key payment dates and frequency
If you’re locked into the standard uplift or estimation methods, your provisional tax is usually split into three instalments across the tax year. The IRD doesn’t send you calendar invites though—so it’s up to you to remember these due dates (or risk late payment penalties, interest, and an awkward call to your accountant).
Here’s a quick breakdown of the standard payment schedule:
| Balance Date (End of Your Financial Year) | 1st Instalment | 2nd Instalment | 3rd Instalment |
|---|---|---|---|
| 31 March (most common) | 28 August | 15 January | 7 May |
| 31 May | 28 October | 15 March | 7 July |
What happens if you miss a payment or underpay?
Penalties and IRD Interest Charges
Missed a provisional tax payment? Or maybe underestimated your income using the estimation method?
Unfortunately, the IRD doesn’t hand out warning letters before slapping on penalties and interest. These charges compound quickly, so it’s worth double-checking your payments and keeping to the due dates. Here’s what you could be looking at:
| Type | Description |
|---|---|
| Late Payment Penalty | Initial 1% the day after due date, plus an extra 4% if unpaid after 7 days |
| Ongoing Monthly Penalty | 1% added every month the amount remains unpaid |
| Use-of-Money Interest (UOMI) | Charged on underpaid tax if you haven’t paid enough provisional tax (estimation method risk) |
| Current IRD Interest Rate | 10.91% (as of March 2025) – changes periodically |
Tax Pooling to reduce penalties
Now here’s a clever workaround if you’ve slipped up: tax pooling.
What is it?
Tax pooling lets you purchase tax payments from other taxpayers who overpaid. These payments are held in a registered tax pooling intermediary account and can be transferred to your IRD account as if you paid on time.
Why it’s helpful:
- Avoid or reduce IRD penalties and interest
- Smooth out cashflow if you’re late with one or more instalments
- Available for both provisional and terminal tax
Popular providers include Tax Traders and TMNZ (Tax Management NZ). Your accountant can usually help arrange it in a pinch.
In 2023, TMNZ reported managing $NZ 1.5 billion in tax payments, saving clients $NZ 30–40 million in interest compared to IRD rates
FAQs About Provisional Tax
What Is the Difference Between Terminal Tax and Provisional Tax?
Great question — and one that trips up more Kiwis than you’d think.
Provisional tax is what you pay in advance during the year based on your expected income (so the IRD doesn’t have to chase you down later). It’s like saying, “Hey IRD, here’s a heads-up payment for my income tax.”
Terminal tax, on the other hand, is the leftover bit. After you file your tax return and tally everything up, if you didn’t pay enough via provisional instalments, you settle the score with terminal tax.
In short:
- Provisional tax = pay as you go
- Terminal tax = top-up if needed
Think of it like ordering drinks before the meal, then settling the final tab after dessert.
How Is Provisional Tax Calculated in NZ?
There are four main methods, and no, the IRD doesn’t pick the best one for you—you have to figure it out (or call your accountant in a mild panic).
Here’s the quick recap:
- Standard Uplift – based on last year’s tax. Easy, predictable, but can be outdated.
- Estimation – you guess your tax based on expected income. Useful if income drops, risky if you underpay.
- Ratio Method – great for GST-registered businesses with fluctuating income. Tax is a % of your sales.
- AIM (Accounting Income Method) – automated through accounting software and based on actual profits every two months. Ideal for small biz or startups.
Each has pros and cons—choose wisely or get help. The IRD won’t hold your hand here.
What Is the AIM Provisional Tax Method?
AIM stands for Accounting Income Method, but let’s be real—it might as well stand for “Awesome If You Hate Surprises.”
With AIM:
- You pay provisional tax based on real-time profits (not guesses)
- Calculations happen via IRD-approved accounting software
- Payments are due every two months, in line with GST (if applicable)
Bonus: If you make a loss, you don’t pay. If you overpay, you can get a quick refund. No more over-forecasting and awkward cashflow crunches.
It’s perfect for new businesses, freelancers, or anyone who likes keeping things tidy and tech-savvy. Just make sure your books are up to date. AIM’s not magic—it still needs clean numbers to work properly.
Final Tips and Next Steps
Voluntary Provisional Tax payments
Believe it or not, sometimes it actually makes sense to pay the IRD early. Shocking, I know.
But hear me out—if you’re expecting a big jump in income (maybe you’ve picked up more clients, signed a juicy rental lease, or launched a side hustle that’s finally taking off), you can make voluntary provisional tax payments before the IRD asks for them.
Why bother?
- It helps smooth out your tax bill across the year
- You might avoid interest and penalties down the track
- You’ll look like a tax genius come terminal tax time
Even if you’re not required to pay provisional tax yet, you can still make payments towards it voluntarily. Just make sure it’s allocated to the right year and tax type (your accountant can help with that if needed).
Managing changes in circumstances
Life happens. Clients ghost you. The market tanks. Or maybe you land a surprise contract and suddenly you’re rolling in it. Either way, your income level doesn’t always stick to the script—and neither should your provisional tax.
If your income changes significantly:
- You can update your estimate with the IRD
- Adjust future instalments to better match your actual income
- Avoid underpayment penalties and use-of-money interest (UOMI)
Just make sure you do it before the next instalment is due. Waiting too long could still land you in penalty town.
Pro tip: Keep a rough forecast of your income and review it monthly. If you’re using Xero or MYOB, it’s even easier to tweak your numbers as you go.
Still confused? Or just want someone else to deal with this mess?
👉 At BH Accounting, we’ll help match you with a tax pro who knows the ins and outs of provisional tax—and won’t charge you for every question you ask.
Because let’s be honest, you’ve got better things to do than decode IRD rules.
Reach out today and let’s make tax a little less taxing.