Provisional tax helps you manage your income tax. You pay it in installments during the year instead of paying a lump sum amount at the end of the year.
If you've had to pay more than $2,500 in tax 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.
A taxpayer does not have pay provisional tax in their first year of business. Any residual income tax payable for the year is due at their terminal tax date if this amount is less than $60,000.
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.
Note: if you operate your business out of a company, it's not necessarily the company that pays the tax. The profit in your company may be moved out to you as a shareholder (by way of a ‘shareholder’s salary) and you'll end up paying provisional tax in your own name instead. When you're a RightWay customer we'll work with you to determine where the income is best to sit.
Calculate your provisional tax
- Use the standard, accounting income method (AIM),estimation or ratio option to calculate your provisional tax.
- 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.
Know your payment dates
Pay provisional tax on fixed dates during the year. Your payment dates will depend on:
- your balance date (when your tax year ends) whether you're GST registered, and
- what calculation option you choose.
.Make sure you pay on time to avoid late payment penalties or interest.
Budget for provisional tax
- Keep track of how much you need to pay and when.
- Set money aside so you'll be ready to pay when the due date arrives
- If you're using AIM your payment will be based on your cashflow in the AIM period.
Click here to go to Inland Revenue's guide on provisional tax . If you're a RightWay customer and have any questions please contact your RightWay accountant, email firstname.lastname@example.org or call 0800 55 024