How does Inland Revenue calculate your provisional tax?

Who pays provisional tax?

If you had more than $2,500 tax to pay at the end of the year from your last income tax return, you'll have to pay provisional tax the following year. This usually happens when you earn income without having tax deducted during the year.

Anyone who pays income tax may need to pay provisional tax including individuals, companies and trusts. Provisional taxpayers often earn:

  • self-employed income
  • rental income
  • income earned as a contractor
  • income from a partnership
  • overseas income.

Tax to pay at the end of the year is called residual income tax (RIT).  Residual income tax is the amount of income tax you pay for the year, less any PAYE and other tax credits you may be entitled to, except for Working for Families Tax Credits.

The provisional tax that you've paid during the year is deducted from any tax owing at the end of the year when you file your tax return. Provisional tax is paid in three instalments during the year, at equal intervals. You won't be required to pay provisional tax if your "residual income tax" from the previous tax year is below a certain amount.

Working out provisional tax

  • There are four ways to calculate your provisional tax - the standard, accounting income method (AIM),estimation or ratio option. Find out more about each one at Inland Revenue.
  • AIM software will tell you how much to pay. As long as you pay in full and on time you won't have to pay penalties or interest.
  • If you're using another method, it's important to accurately calculate how much you need to pay to avoid penalties or interest.

Download our helpful tool to help give you an idea of what your tax obligations might be. If you or your business experienced any significant change in the past year, your best option might be to work with us to create an income tax forecast for the year and file an estimate with Inland Revenue.

You can also use Inland Revenue's provisional tax estimation and re-estimation tool, but we recommenced that you work with an accountant to get the best results possible.

Need help?

Call us on 0800 555 024, email or contact your RightWay accountant