Provisional tax is how self-employed New Zealanders and businesses pay income tax through the year — rather than in one lump sum after filing. Understanding how it works, which calculation method suits you, and when instalments are due prevents costly use-of-money interest charges.
Provisional tax applies when your income tax bill (residual income tax, or RIT) is $5,000 or more. The standard method pays three instalments on 28 August, 15 January, and 7 May — each based on 105% of your previous year's RIT. If your income has changed significantly, use the estimation method to pay what you actually expect to owe. Getting it wrong leads to use-of-money interest at around 10.9%.
What Is Provisional Tax?
When you are self-employed or have untaxed income, IRD doesn’t collect tax from you in real time. Instead, you pay provisional tax — estimates of your upcoming year’s tax — in three instalments during the year. After filing your return, the actual tax owed is calculated. Any difference from what you paid is either refunded or billed as terminal tax.
Provisional tax vs terminal tax:
- Provisional tax — paid across the year, before you know your final liability
- Terminal tax — the top-up (or refund) after your return is filed and actual tax calculated
Who Must Pay Provisional Tax?
You must pay provisional tax if your residual income tax (RIT) from the previous year was $5,000 or more.
Residual income tax = Total income tax liability − PAYE already deducted − Other tax credits
If your previous year’s RIT was under $5,000, you are a “non-provisional taxpayer” — you pay all your tax as a lump sum (terminal tax) after filing your IR3. First-year self-employed people are often in this category in their first year.
The Three Provisional Tax Methods
1. Standard Method (most common)
Instalments are calculated as 105% of your previous year’s RIT, spread across three payments.
Example: Previous year’s RIT was $12,000.
- Uplift amount: $12,000 × 1.05 = $12,600
- Each of the first two instalments: $12,600 × 35% = $4,410
- Third instalment: $12,600 − $4,410 − $4,410 = $3,780
Advantage: Simple, and IRD will not charge use-of-money interest if you follow the standard method calculations exactly — even if your actual tax ends up being more.
2. Estimation Method
You estimate your expected income for the year and calculate provisional tax based on that estimate.
When to use it:
- Income has dropped significantly from last year (avoids overpaying)
- First year in business (no prior year RIT to base standard method on)
- Significant one-off income in a prior year that won’t repeat
Risk: If you underestimate, IRD charges use-of-money interest on the shortfall from the instalment dates. If you overestimate, you get a refund but have overpaid cash unnecessarily.
3. Ratio Method
Available only to GST-registered businesses. Provisional tax is paid with each GST return — 8.5% of GST-exclusive supplies for 6-monthly filers, or 6.5% for more frequent filers.
When to use it:
- Income fluctuates significantly through the year
- You prefer to pay tax aligned with when you earn (cash flow smoother)
- You are on 2-monthly GST returns
Provisional Tax Instalment Dates
Dates are based on your balance date (most NZ businesses use 31 March):
| Instalment | Standard date | Amount (standard method) |
|---|---|---|
| 1st instalment | 28 August | 35% of uplift amount |
| 2nd instalment | 15 January | 35% of uplift amount |
| 3rd instalment | 7 May | Remaining balance |
If using the ratio method with 2-monthly GST returns, payments are due with each GST return.
Use-of-Money Interest (UOMI)
If you underpay provisional tax, IRD charges use-of-money interest on the shortfall:
- Current UOMI rate: 10.89% per annum (IRD updates this regularly)
- Interest runs from the provisional tax due date to when the tax is paid
- Interest compounds daily
How to avoid UOMI:
- Use the standard method — IRD does not charge UOMI if you pay at least 105% of the prior year’s RIT on time, even if actual tax is higher
- Use the estimation method carefully — only underestimate if you are confident in your lower income
- Use tax pooling — a third-party tax pooling service can cover shortfalls at lower interest rates than IRD’s UOMI
Tax Pooling
Tax pooling intermediaries (such as Tax Management NZ or Tax Traders) allow you to buy tax from other taxpayers who overpaid, or sell your overpaid tax. The interest rate on pooled tax is typically 2–4% lower than IRD’s UOMI rate.
Tax pooling is worth considering if:
- You have missed a provisional tax instalment
- You used the estimation method and underestimated
- Your income was unexpectedly high and you face a large terminal tax bill
See our Tax Pooling Explained guide for details.
Safe Harbour Provisions
There are situations where IRD does not charge UOMI even if you underpaid:
- Standard uplift method used correctly — no UOMI charged on any shortfall (terminal tax may still be owed)
- RIT under $60,000 and standard method used — no UOMI on the balance until the terminal tax due date
- New taxpayers — no UOMI in your first year of provisional tax if you pay on time
First Year of Self-Employment
In your first year, you typically have no previous year’s RIT to base the standard method on. Options:
- Pay zero provisional tax and pay all tax as terminal tax after filing (if RIT ends up under $60,000, no UOMI applies for most taxpayers)
- Use the estimation method to pre-pay if you expect a large bill
- Set aside 20–30% of income throughout the year to cover your terminal tax bill
Frequently Asked Questions
What is residual income tax (RIT)?
RIT is the income tax you owe after subtracting any PAYE already withheld and tax credits. It is the figure that determines whether you are a provisional taxpayer ($5,000+) and how much you pay. Find it on your income tax assessment or calculate it from your IR3.
Can I change from standard to estimation method mid-year?
Yes. You can switch to the estimation method at any time before the instalment due date. Simply estimate your income, calculate the expected tax, and pay accordingly. Keep records of how you calculated your estimate in case IRD queries it.
What if I pay provisional tax but earn less than expected?
If your actual RIT is less than what you paid in provisional tax, you receive a refund after filing your IR3. The refund is paid into your nominated bank account through myIR.
Do companies pay provisional tax the same way?
Yes, the same structure applies to companies. The company’s RIT threshold is also $5,000. The same three methods are available and the same instalment dates apply for companies with a 31 March balance date.
What happens if I miss a provisional tax instalment?
UOMI begins accruing from the due date on any unpaid amount. Pay as soon as possible — interest compounds daily. If you cannot pay in full, a partial payment reduces the base on which interest is calculated. Contact IRD if you need a payment arrangement.