Provisional Tax in New Zealand
If you’re self-employed as a sole trader, contractor or freelancer, provisional tax is how you pay your income tax – in instalments through the year, not one nasty lump at the end. Here’s exactly how it works, who pays it, and when it’s due.
- When you have to pay it – the $5,000 threshold, explained
- Every instalment date for a 31 March balance date
- The four options, safe harbour and use‑of‑money interest
Provisional tax estimator
Standard optionYour payment schedule
Most people make 3 provisional tax payments a year. Switch to 2 only if you file your GST returns six-monthly.
Standard option uplifts last year’s RIT by 5% (×1.05).
Estimate only – standard option, 31 March balance date. Not tax advice.
What is provisional tax?
Provisional tax is income tax paid in instalments during the year, rather than in a single lump sum after the year ends. Think of it as paying as you go towards the tax you’ll owe on income that hasn’t already had tax deducted at source – like the money a sole trader, contractor or landlord earns.
The most important thing to understand: provisional tax is not a separate or extra tax. It’s the same income tax you’d pay anyway, just spread across the year. When you file your tax return, every provisional tax payment is deducted from your residual income tax – leaving only a small terminal tax balance to settle (your final tax bill for the year), or a refund if you paid too much.
Paid through the year
Instead of one big bill, you make instalments – usually three for a 31 March balance date. It keeps tax in step with the income you’re earning.
Squared up at year-end
At return time your provisional payments come off your residual income tax. Underpaid? You settle the terminal tax. Overpaid? Inland Revenue refunds you.
Do you have to pay provisional tax?
The simple rule: you generally have to pay provisional tax in a year if your residual income tax (RIT) was more than $5,000 in your previous return. If last year’s RIT was $5,000 or less, you usually don’t.
Residual income tax is the income tax on your taxable income for the year, after subtracting credits like PAYE and resident withholding tax (RWT), but before any provisional tax you’ve already paid. It’s the net figure that decides whether you’re in the provisional tax net.
That’s why provisional tax mostly lands on sole traders, contractors, freelancers, rental owners and partners – people earning income that hasn’t been taxed at source.
Last year’s RIT over $5,000 → you pay provisional tax this year. (The threshold was lifted from $2,500 to $5,000 from the 2020 income year.)
Special cases apply – for example, switching from a salary to self-employment can bring you in even when the $5,000 rule alone wouldn’t. Check with the Inland Revenue Department (IRD) or your accountant.
Provisional tax dates
For the standard option with a 31 March balance date, your provisional tax payments are due on three instalment dates through the year. If a payment date lands on a weekend or public holiday, the due date moves to the next business day.
Roughly five months into the tax year.
The mid-summer one – easy to forget over the holidays.
Just after the income year ends on 31 March.
File six-monthly GST returns?
You pay just two instalments instead of three: 28 October and 7 May.
Terminal tax
Any balance left over is due 7 February the following year – or 7 April if you have a tax agent with an extension of time.
Standard-option instalment due dates by tax year
| Tax year | P1 | P2 | P3 |
|---|---|---|---|
| 2026 (yr to 31 Mar 2026) | 28 Aug 2025 | 15 Jan 2026 | 7 May 2026 |
| 2027 (yr to 31 Mar 2027) | 28 Aug 2026 | 15 Jan 2027 | 7 May 2027 |
None of these dates falls on a weekend or public holiday, so no shift applies. Non-standard balance dates have different due dates – check myIR.
The four ways to calculate it
Inland Revenue lets you work out provisional tax four ways. Most provisional taxpayers sit on the standard option by default – but the others can fit better if your income jumps around.
Standard option
The defaultInland Revenue bases your provisional tax on last year’s residual income tax plus an uplift: 5% of your previous year’s RIT once that return is filed (or 10% of the year-before-last’s RIT for any instalment that falls due before the previous return is filed). It’s split into equal instalments.
Estimation option
You forecastYou estimate your own residual income tax for the year and pay that in instalments, re-estimating if your income shifts. Under-estimate and you can be charged use-of-money interest on the shortfall – choosing estimation also gives up the standard-option safe harbour, so interest can run from the first instalment.
Ratio option
Tracks your salesInland Revenue works out a percentage from your past tax returns and applies it to your GST taxable supplies each period, so payments rise and fall with your actual sales. Paid in six instalments aligned to two-monthly GST. You must apply before the income year starts.
AIM
Pay as you profitThe Accounting Income Method uses approved accounting software to calculate tax on your actual profit each period – you only pay when you make a profit, and can even get a refund during the year if you make a loss. It’s the one option under which first-year provisional tax can apply.
GST-registered and weighing the ratio option? It’s worth knowing your GST inside out first – try our free NZ GST calculator to check the GST content of any sale or expense.
Safe harbour & use-of-money interest
Get your instalments wrong and Inland Revenue can charge interest. But there’s a generous shelter for most provisional taxpayers – the safe harbour.
The safe harbour: RIT under $60,000
If you use the standard option and your RIT for the year comes in under $60,000, Inland Revenue won’t charge use-of-money interest on a per-instalment basis. Interest only starts from the day after your terminal tax date if anything’s still owing.
Since the 2023 income year you don’t even have to pay every instalment exactly on time to keep this shelter – you just need your full RIT paid by the terminal tax date. (Late-payment penalties can still apply to a late instalment, but those are separate from interest.)
If you underpay, IRD charges
8.97% p.a.
Use-of-money interest on the shortfall.
If you overpay, IRD pays you
2.25% p.a.
Credit interest on the overpayment.
Both rates took effect 16 January 2026 and are current as at June 2026. No interest is charged or paid if you’re out by $100 or less. These rates are set by Order in Council and change every 6–12 months, so confirm the current figure on the Inland Revenue website before relying on it. Choosing the estimation option gives up the safe harbour – interest can run from your first instalment if you under-estimate.
New business? Watch the second-year squeeze
Your first year in business is usually provisional-tax-free – but that’s exactly what catches people out in year two.
Year one: no provisional tax, but the tax bill still builds
On the standard, estimation or ratio options you don’t pay provisional tax in your first year – there’s no prior-year RIT over $5,000 to trigger it. But the year isn’t tax-free: your first-year income tax is still due, usually by 7 February the following year (7 April with a tax agent). Only AIM, the Accounting Income Method, has you paying as you profit in year one.
Year two: two tax bills land close together
Now your first-year income tax (around 7 February or 7 April) falls near your second-year provisional instalments. A profitable new business can face roughly 1.5–2× a normal year’s tax in a short window. This is the classic provisional-tax cash-flow squeeze.
Soften it: pay early, set money aside
You can make voluntary provisional tax payments during year one to spread the load – and first-year sole traders who pay early may qualify for the early-payment discount (4.25% for the 2027 income year; it’s reset annually). Setting aside a fixed slice of every payment you receive is the simplest defence. Tax pooling through a registered intermediary is another way to manage the timing and reduce interest.
This guide is general information, not tax advice. Provisional tax has special cases and the figures here (interest rates, the early-payment discount) change over time – they’re current as at June 2026. Check Inland Revenue or your accountant for your own situation.
Provisional tax at a glance
The key NZ provisional tax numbers in one place. Figures current as at June 2026.
| Standard tax year (income year) | 1 April – 31 March |
| Standard balance date | 31 March |
| You must pay provisional tax if last year’s RIT was | More than $5,000 |
| Standard-option uplift (prior return filed) | 105% of last year’s RIT |
| Standard-option uplift (prior return not yet filed) | 110% of the year-before-last’s RIT |
| Standard instalments (31 March balance date) | 28 Aug · 15 Jan · 7 May |
| GST six-monthly filers – 2 instalments | 28 Oct · 7 May |
| Terminal tax due (no tax agent) | 7 February the following year |
| Terminal tax due (tax agent with extension) | 7 April |
| Safe-harbour RIT threshold (standard option) | Under $60,000 |
| Use-of-money interest – you underpay | 8.97% p.a. |
| Use-of-money interest – you overpay | 2.25% p.a. |
| No interest charged/paid if out by | $100 or less |
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Provisional tax questions
The things sole traders and contractors ask most.
Provisional tax is income tax paid in instalments during the year instead of in one lump sum after the year ends. It is not a separate or extra tax – it is the same income tax, paid in advance towards what you expect to owe. When you file your tax return, the provisional tax payments you have made are deducted from your residual income tax, leaving only a small terminal tax balance to settle, or a refund if you overpaid.
You generally have to pay provisional tax in a year if your residual income tax (RIT) from your previous return was more than $5,000. If your RIT for the previous tax year was $5,000 or less, you usually do not have to pay it. RIT is your income tax for the year after PAYE and other tax credits, but before any provisional tax already paid.
Usually no – if you use the standard, estimation or ratio options you will not pay provisional tax in your first year, because there is no prior-year RIT over $5,000 to trigger it. But your first year is not tax-free: your first-year income tax is still due, usually by 7 February the following year (7 April if you have a tax agent with an extension of time). The exception is AIM, where provisional tax can be due in your first year when you make a profit.
In your second year you can end up paying your first-year income tax at around the same time as your second-year provisional tax instalments. Because these fall close together, a profitable new business can face roughly 1.5 to 2 times a normal year of tax within a short window – the classic provisional-tax cash-flow squeeze. To soften it, you can make voluntary payments during your first year and set money aside as you earn.
Under the standard (uplift) option, your provisional tax is your previous year’s RIT plus 5% (105%) once that tax return is filed. If an instalment falls due before your previous year’s return is filed – usually only if you have an extension of time – that instalment is based on your RIT from two years ago plus 10% (110%), switching to the 105% basis once the previous year’s tax return is filed. The total is paid in equal instalments.
For a standard 31 March balance date, the three standard-option instalments are due 28 August, 15 January and 7 May. If you are GST-registered and file six-monthly GST returns, you pay just two instalments, due 28 October and 7 May. The ratio option is paid in six instalments aligned with two-monthly GST returns. If a due date falls on a weekend or public holiday, you can pay on the next business day without penalty.
They are two sides of the same year’s income tax. Provisional tax is paid in instalments during the year. After you file your tax return, your provisional tax payments are deducted from your residual income tax, and any balance left over is your terminal tax, the final tax bill for the year. Terminal tax is due 7 February the following year, or 7 April if you have a tax agent with an extension of time. If you overpaid, you get a refund.
If you use the standard option and your RIT for the year is under $60,000, the use-of-money interest safe harbour applies. Inland Revenue does not charge interest on a per-instalment basis – interest only runs from the day after your terminal tax due date if any RIT is still unpaid. From the 2023 income year you no longer have to pay every interim instalment on time to keep this protection, as long as your full RIT is paid by the terminal date (late-payment penalties can still apply to instalments paid late, but they are separate from interest).
As at June 2026, Inland Revenue charges use-of-money interest of 8.97% per annum on underpaid tax and pays 2.25% per annum on overpaid tax (both effective 16 January 2026). No interest is charged or paid if you are out by $100 or less. These rates are set by Order in Council and change roughly every 6 to 12 months, so check the current rate on the Inland Revenue website before relying on it.
If your income is variable or seasonal, the ratio option (payments based on your GST sales) or AIM, the Accounting Income Method (pay only when you make a profit), can suit better than the standard option. AIM is the only option that can give you a refund during the year if you make a loss, but it needs approved accounting software and turnover under $5 million. The estimation option lets you set your own figure, but it gives up the safe harbour, so interest can run from the first instalment if you under-estimate.
Yes. First-year sole traders, partners and look-through company owners who get most of their income from the business may qualify for the early-payment discount by making a voluntary income tax payment before the end of the income year and applying by their return due date (and having no provisional tax obligation that year or in the previous four years). The rate is reset each year – it is 4.25% for the 2027 income year. Because it changes annually, check Inland Revenue for the current rate.
Registered for GST too? Work out the GST on any invoice or expense with our free GST calculator for New Zealand.