Provisional Tax
Provisional tax is how self-employed individuals, companies, and others with significant non-PAYE income pay their expected income tax during the year, rather than as a lump sum after year end. You're required to pay provisional tax if your residual income tax (RIT) in the previous year exceeded $5,000.
There are three calculation methods: standard (105% of last year's RIT, or 110% of the RIT from two years ago if last year's return isn't filed yet), estimation (your own estimate of the current year's tax — useful if income has changed), and the Accounting Income Method (AIM, available through compatible accounting software for real-time provisional tax based on actual income).
Provisional tax is typically due in three instalments: 28 August, 15 January, and 7 May for a 31 March balance date. What reduces that to two instalments is paying GST on a six-monthly basis — those taxpayers pay on 28 October and 7 May instead, while the GST ratio option pays six instalments on the two-monthly GST cycle. Being linked to a tax agent does not change the provisional instalments at all; it moves your terminal tax date from 7 February to 7 April and your IR3 filing date from 7 July to 31 March. Late payments attract use-of-money interest, so it's important to manage your cash flow to meet these deadlines.
How it works
The three calculation methods suit different situations. The standard method (105% of last year's RIT, or 110% of the RIT from two years ago if last year's return isn't filed yet) is simplest and works well when your income is stable or growing, but can overpay if your income has genuinely dropped. The estimation method lets you use your own forecast instead, which suits a real income drop but carries the risk of use-of-money interest if you underestimate by too much. AIM ties your instalments to real, per-period income reported through IRD-approved accounting software, which suits businesses with seasonal or fluctuating income since you're not prepaying tax on income you haven't yet earned.
Meeting each instalment on time using the standard-uplift amount matters for a narrower reason than it used to: it keeps you clear of late-payment penalties on that instalment — 1% as soon as it is overdue, plus a further 4% if it is still unpaid seven days later. It is not what qualifies you for the 'safe harbour' protection from use-of-money interest. That protection turns on being on the standard uplift method (or having no provisional tax obligation at all) and on residual income tax under $60,000 for the year; the requirement to have paid each instalment in full and on time was repealed from the 2022-23 income year, so a missed instalment no longer costs you the safe harbour.
Provisional tax and PAYE (or RWT) work together, not separately — your provisional tax obligation is driven by your residual income tax, meaning the income tax left over after subtracting what's already been withheld at source. Someone with a mix of salary and untaxed business income only needs to provisionally pay tax on the untaxed portion, since PAYE already covers the rest.
Example: standard-method provisional tax instalments
Last year's residual income tax (RIT) was $9,000. Under the standard method, this year's provisional tax is 105% x $9,000 = $9,450.
That amount is split into three equal instalments due 28 August, 15 January, and 7 May: $9,450 ÷ 3 = $3,150 per instalment.
Frequently asked questions
What happens if my income this year is much lower than last year?
You can switch to the estimation method and pay based on your own realistic forecast instead of the standard 105%/110% uplift on last year's figures — just be careful not to underestimate too far, since a significant underpayment can still attract use-of-money interest.
Do I still have to pay provisional tax if I expect to owe less this year?
If your prior-year residual income tax was over $5,000, you're generally required to keep making provisional tax payments even if you expect a lower liability this year — using the estimation method to lower your instalments is the correct way to reflect that, rather than simply skipping payments.
Can any business use the AIM method?
AIM is only available if you use IRD-approved accounting software that supports real-time income reporting — if your software doesn't support AIM, you'll need to use the standard or estimation method instead.
Related Terms
IRD
Inland Revenue Department (IRD), commonly known as Inland Revenue or simply IRD, is the New Zealand government agency responsible for collecting taxes, distributing social support payments, and enforcing tax compliance.
Income Tax
New Zealand income tax is calculated using a progressive bracket system.
Residual Income Tax (RIT)
Residual Income Tax (RIT) is your total income tax liability for the year minus any tax already paid through PAYE, RWT, and other tax credits.
UOMI (Use of Money Interest)
Use of Money Interest (UOMI) is the interest Inland Revenue charges when tax is paid late or underpaid, and pays when tax is overpaid.
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