Provisional Tax

Provisional tax is not a separate tax but a way of paying your income tax as the income is received through the year. Instalments of income tax are paid during the year, based on what you expect your tax bill to be. The amount of provisional tax you pay is then deducted from your tax bill at the end of the year.

If your residual income tax is $2,500 or more you will have to pay provisional tax for the following year. Residual income tax is the tax payable after subtracting any rebates you are eligible for and any tax credits (excluding provisional tax). Residual income tax is clearly labelled in the tax calculation in your tax return.

There are two options for working out your provisional tax: standard and estimation.

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Standard Option

The IRD automatically charges provisional tax using the standard option unless you choose the estimation option. Under this option:

Your provisional tax payable is your previous year’s residual income tax plus 5%
Change in the tax rates may have an effect on the calculation of your provisional tax

Estimation Option

The other way to work out your provisional tax is to estimate what your residual income tax will be. When working out the tax, keep the following points in mind.

You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable.
Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount.
To get the right tax rate:
– add up all your estimated income;
– work out the tax on the total;
– then subtract any tax credits (like PAYE).

Due Dates

If you have a 31 March balance date, provisional tax payments are due on:

First instalment: 28 August
Second instalment: 15 January
Third instalment: 7 May

Interest

In some circumstances you may be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference.

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