Provisional Tax in New Zealand: Who Pays and When

Who pays provisional tax: the $5,000 RIT test

Provisional taxpayers often have self-employed, rental, contracting, partnership or overseas income. Salary earners can be caught too: a wrong tax code or RWT rate, a lump sum or employee share scheme income with no tax deducted, or a bright-line property sale can push RIT over the line. Residual income tax is the tax left on your assessment after taking off PAYE, withholding tax and tax credits. If your RIT in one year is more than $5,000, you pay provisional tax in the next. For example, if your 2025–26 return shows RIT over $5,000, you pay provisional tax during 2026–27.

In your first year in business you usually have no prior RIT over $5,000, so provisional tax is not compulsory. The catch is that the first year's full tax bill and the second year's first instalment can land close together. If you expect your tax to be over $5,000, Inland Revenue lets you choose to become a provisional taxpayer, and voluntary payments made before tax is due may earn an early payment discount.

The standard option: last year plus 5%

The standard option is the default. Your provisional tax for the year is last year's RIT plus 5%. If you have an extension of time to file and last year's return is not in by an instalment date, that instalment uses RIT from two years ago plus 10% instead. Without an extension the plus-5% rule applies even if you file late. You pay three instalments, or two if you file GST six-monthly. It suits income that is steady or growing.

Worked example: a sole trader made $70,000 profit in 2025–26 with no tax deducted, so her RIT was $13,220.50. Under the standard option her 2026–27 provisional tax is $13,881.53, three instalments of $4,627.18. If she had a tax agent with an extension of time, had not filed her 2025–26 return by the first instalment date, and her RIT two years ago was $11,000, the first instalment would be a third of $12,100 (plus 10%) instead, with the later instalments catching up to the plus-5% figure.

The interest treatment is the big attraction. If your RIT is under $60,000, Inland Revenue charges or pays interest only from the day after your end-of-year tax due date (before the 2023 income year, late instalments drew interest straight away). If your RIT is $60,000 or more, interest on any shortfall runs from the day after the final instalment date, and late or short earlier instalments draw interest from their own due dates.

The estimation option: when income will drop

With the estimation option you tell Inland Revenue what you expect your RIT to be, and pay that in instalments. You can estimate, or re-estimate, at any instalment date or any time up to the final instalment date. You can even estimate $0 if you do not expect to have any RIT. It also suits someone moving from self-employment to a salaried job, where tax is taken at source.

It suits a falling income. If our sole trader expects only $55,000 profit in 2026–27 (RIT of about $8,200.50 after the $520 independent earner tax credit), estimating saves her paying $5,681.03 more than she needs to during the year. The risk is interest: on the estimation option Inland Revenue compares what you paid at each instalment with a third of your actual RIT and charges interest on any shortfall from the instalment date, even if you paid your estimate in full and on time. It may also charge a penalty if the estimate was too low. If you switch from standard to estimation part-way through the year, interest is worked out as if you had estimated for the whole year.

The ratio option: tied to your GST turnover

The ratio option sets each payment as a percentage of the GST turnover you report, so tax follows your cash flow. It has the most conditions:

If you pay the ratio instalments on time, Inland Revenue charges no interest on your provisional tax. Elect in myIR or by phone before the income year starts. For a 31 March balance date that means by 31 March for the following year, and it cannot be backdated. You drop out if, for example, you fall 60 or more days behind on GST returns or move to six-monthly GST.

• In business and GST-registered for the whole previous tax year and part of the year before.
• Previous-year RIT over $5,000 and no more than $150,000.
• GST returns filed monthly or two-monthly. Partnerships cannot use it.
• A ratio percentage, calculated by Inland Revenue, between 0% and 100%.

AIM: the accounting income method

AIM is available to individuals and companies with yearly turnover under $5,000,000. You need AIM-capable accounting software, which works out each payment from actual profit to date and files a statement of activity with each instalment. You only pay when the business is profitable, and a loss can produce a refund straight away.

You can sign up for AIM at any time during the year. Pay in full and on time and no use-of-money interest is charged; pay late or short and interest runs from the day after that instalment was due. Inland Revenue does not pay interest on AIM overpayments. Miss statements of activity repeatedly and you may be moved to the estimation option. AIM users are switched back to the standard option at the start of each tax year; filing your first statement of activity for the new year switches you back to AIM.

Provisional tax due dates for 2026–27

For a 31 March balance date, the standard and estimation options use three instalments: 28 August 2026, 15 January 2027 and 7 May 2027. Standard-option payers who file GST six-monthly pay two instalments instead of three. Ratio users pay six times; AIM users pay six times if they file GST two- or six-monthly or are not GST-registered, and twelve times if they file GST monthly. With a different balance date, myIR shows your own dates under the income tax account.

Remember that terminal tax is separate. Any balance owing for the year after your return is filed is due on 7 February of the following year, or 7 April if you have a tax agent with an extension of time.

Use-of-money interest and late payment penalties

Use-of-money interest is charged on underpaid tax at 8.97% and paid on overpaid tax at 2.25% (rates from 16 January 2026). It is calculated daily, does not compound, is not charged or paid on differences of $100 or less, and the interest you pay is deductible for a business. An estimation-option payer who is $2,000 short at one instalment for 120 days pays about $58.98 in interest. Interest you receive is taxable income.

Late payment penalties are separate from interest: 1% the day after a due date, then 4% of the tax and penalty still unpaid on the seventh day, with a possible grace period for a first late payment in two years. On AIM, penalties and interest run from each missed instalment once you file the statement of activity; on the other options Inland Revenue says it does not charge them until you file your end-of-year return, and the ratio option can still attract penalties for late or short instalments. Interest is worked out once your return is filed, so the bill for a bad year arrives with your assessment.