Provisional Tax for the Self-Employed
How provisional tax works for NZ self-employed people and contractors — standard method, estimation method, AIM, payment dates, and use-of-money interest.
Published 22 March 2026 · Reviewed by NZ Tax Tools Editorial Desk
When you’re self-employed or earn income that isn’t subject to PAYE withholding, you don’t have an employer deducting tax for you. Instead, you’re responsible for paying your own income tax — and the IRD wants you to pay it throughout the year rather than in one lump sum at the end. This is provisional tax, and understanding how it works is essential for anyone running their own business in New Zealand.
Who Pays Provisional Tax?
You’re required to pay provisional tax if your residual income tax (RIT) from the previous year — or expected this year — is more than $5,000.
Residual income tax is your total income tax liability for the year, minus any tax already paid through:
- PAYE withholding (from any employment income)
- Withholding tax on interest or dividends
- Tax paid by portfolio investment entities (PIE funds)
If your RIT is $5,000 or less, you’re a standard taxpayer — you pay your income tax in one annual payment (due 7 February after the tax year ends) and don’t have provisional tax obligations.
Once your RIT exceeds $5,000, provisional tax applies. Many self-employed people hit this threshold even at moderate income levels because there’s no employer doing automatic withholding.
Example: At $65,000 self-employment income, your income tax is approximately $12,520. After no PAYE withholding, your full RIT is $12,520 — well above the $5,000 threshold.
The Three Methods
You have three options for calculating your provisional tax payments. The method you choose affects how much you pay and when.
Method 1: Standard (Uplift) Method
The most common method. Your provisional tax is calculated as a percentage uplift on your prior year’s RIT:
- If IRD issues your prior year assessment before your first provisional payment: 105% of prior year RIT
- If you use a tax agent with an extended deadline: same 105% uplift
Example:
Prior year RIT: $11,000 Provisional tax for current year: $11,000 × 105% = $11,550
This $11,550 is split across three instalments. If your actual RIT this year turns out to be higher than $11,550, you pay the difference (plus use-of-money interest on the shortfall). If your RIT is lower, you receive a refund.
The standard method works well when your income is fairly stable year-to-year. If your income has increased substantially, you’ll underpay and face interest charges. If it’s dropped, you’ll overpay but get a refund.
Method 2: Estimation Method
You can estimate your income tax for the current year based on your expected income. This gives you more flexibility but also more risk.
When estimation is useful:
- Your income has changed significantly from last year (new business, lost a client, expanded)
- You’ve had a one-off income event that inflated last year’s RIT
- You want to match cash flow more closely to actual tax liability
The risk: If you underestimate and your actual RIT is more than 5% above your estimate, IRD charges use-of-money interest on the shortfall from when it should have been paid.
If you realise mid-year that you’ve underestimated, you can increase your estimate to limit the interest charges.
Method 3: Accounting Income Method (AIM)
AIM is an option for smaller businesses (taxable income under $5 million) using qualifying accounting software. Instead of fixed annual provisional tax payments, you pay provisional tax every time you file a GST return (monthly or two-monthly), based on your actual income and expenses in that period.
Advantages:
- Payments are closely aligned with actual income — you don’t overpay during slow periods
- No use-of-money interest if you follow AIM correctly
- Smooths out cash flow throughout the year
Disadvantages:
- Requires compatible accounting software (Xero, MYOB, etc.)
- More frequent compliance work
- Not suitable for businesses with very irregular income
AIM is growing in popularity among small businesses that already use cloud accounting software.
Provisional Tax Payment Dates
For businesses with a 31 March balance date (the most common), provisional tax is due on three dates spread through the year:
| Instalment | Due Date |
|---|---|
| 1st | 28 August |
| 2nd | 15 January |
| 3rd | 7 May |
Example using standard method with prior year RIT of $11,000:
Total provisional tax = $11,550
| Instalment | Amount |
|---|---|
| 1st (28 August) | $3,850 |
| 2nd (15 January) | $3,850 |
| 3rd (7 May) | $3,850 |
If you have a balance date other than 31 March (e.g., 30 June for a business incorporated mid-year), your payment dates shift accordingly.
Use-of-Money Interest (UOMI)
If you underpay provisional tax, IRD charges use-of-money interest on the underpayment — not a penalty, but a charge for the time value of money.
Current UOMI rates (2025-26):
- IRD charges you: 10.91% per annum on underpayments
- IRD pays you: 4.67% per annum on overpayments
UOMI runs from the date a payment should have been made to the date the tax is actually paid. It’s calculated daily.
Example:
You had an RIT of $15,000 but only made provisional payments totalling $10,000. The $5,000 shortfall is subject to UOMI from the date of the third provisional tax payment (7 May) until you pay. At 10.91%, a $5,000 shortfall for 3 months would accrue approximately $136 in interest.
UOMI is not deductible as a business expense — it’s a private cost.
Safe Harbour from UOMI
You can avoid UOMI charges through the safe harbour provisions:
- Standard method safe harbour: If you pay at least 105% of your prior year’s RIT (using the standard method) across your three instalments, you’re safe from UOMI — even if your actual RIT ends up higher
- Small amount safe harbour: If your prior year RIT was under $60,000 and you paid using the standard method, UOMI only applies after 7 May (the third instalment date), not from the first two instalment dates
The safe harbour is why the standard method is popular — even if your income jumps significantly, you avoid interest charges by paying the 105% uplift.
Practical Tips for Managing Provisional Tax
Set aside tax as you earn: A common approach for self-employed people is to transfer approximately 30–35% of all income received into a separate savings account. This covers both income tax and GST (if applicable) and prevents the money being spent before tax is due.
Track your income through the year: If you’re using the estimation method, regularly compare your actual income to your estimate and adjust if needed.
Don’t forget ACC levies: ACC will also invoice you for self-employed levies after your income tax return is filed. These are separate from provisional tax but are another significant annual cost for self-employed people.
Consider a tax agent: Tax agents (accountants or tax advisers) often have extended filing deadlines (e.g., 31 March instead of 7 July for year-end returns), which can give you more time to assess your actual RIT before the third provisional payment.
End-of-Year Reconciliation
Regardless of which method you used, at the end of the tax year you file an IR3 income tax return and calculate your actual RIT. This is reconciled against what you’ve paid:
- Overpaid: IRD issues a refund (plus UOMI at 4.67% if the overpayment was significant)
- Underpaid: You pay the balance by 7 February (or later with a tax agent) plus any UOMI charges
Summary
- Provisional tax applies when your residual income tax exceeds $5,000
- Three methods: standard (105% uplift), estimation, or AIM
- Standard method: three instalments on 28 August, 15 January, and 7 May
- Safe harbour: pay 105% of prior year RIT to avoid use-of-money interest
- UOMI is charged on underpayments at 10.91% p.a.; paid on overpayments at 4.67% p.a.
- File an IR3 return at year end to reconcile actual RIT against provisional payments
Use the Self-Employment Tax Calculator to estimate your annual income tax and provisional tax instalments based on your expected self-employment income.