The first year in business feels like the tax system hasn’t noticed you yet. Then the second year arrives and it notices you twice. That “double hit” is one of the most common cash shocks for young New Zealand businesses — and it’s entirely predictable once you understand how provisional tax works.
What is provisional tax?
Provisional tax is a way of paying income tax in instalments during the year, instead of one lump sum after the year ends. Inland Revenue says you must pay provisional tax if your residual income tax (RIT) — broadly, your income tax after credits like PAYE — from the previous year was more than $5,000 (Inland Revenue).
It affects sole traders, contractors, partners in partnerships, companies and anyone with meaningful income that doesn’t have tax deducted at source.
Why the first years can hit twice
Here’s the sequence for a business with a 31 March balance date that starts trading in, say, April 2025:
- Year one (1 April 2025 – 31 March 2026): you earn a profit, but you had no RIT last year, so you’re usually not required to pay provisional tax during the year.
- After year one: you file your return and pay the whole year’s tax as terminal tax.
- Year two: because your year-one RIT was over $5,000, you now owe provisional tax for year two as well — usually calculated from year one’s tax plus an uplift if you use the standard option.
The result: year-one terminal tax and year-two provisional instalments can land within weeks of each other. If you haven’t saved for both, it’s a crunch.
IRD is blunt about it: “Your first year in business is not tax free.” You can make voluntary payments during your first year, and IRD notes early payments may qualify for an early payment discount.
The main provisional tax options
| Option | How it works | Suits |
|---|---|---|
| Standard | Based on last year’s RIT plus a set uplift | Steady businesses; simplest |
| Estimation | You estimate this year’s RIT | Businesses expecting income to drop |
| Ratio | Based on a percentage of your GST taxable supplies | GST-registered businesses filing one- or two-monthly |
| AIM (accounting income method) | Calculated from accounting software each period | Businesses with irregular income, using compatible software |
Fast-growing businesses on the standard option can find the uplift is well below their actual growth — which means a large terminal tax bill later. Estimation, ratio or AIM can match payments more closely to real income. Your accountant can help you choose.
Due dates
For a 31 March balance date on the standard or estimation option, provisional tax is generally due in three instalments: 28 August, 15 January and 7 May. Terminal tax is generally due on 7 February following the end of the year, or later if you have a tax agent with an extension of time. Different options and balance dates have different schedules — check IRD’s payment dates page.
Use-of-money interest and the safe harbour
Inland Revenue charges interest on underpaid provisional tax and pays interest on overpayments. A few rules help smaller businesses (Inland Revenue):
- Safe harbour: if your RIT is under $60,000 and you use the standard option, interest generally only starts from the day after your terminal tax due date — as long as you pay the instalments IRD calculated.
- New provisional taxpayers: if you become liable in your first year, you generally won’t face interest from before the first instalment date that falls after you start the business, as long as that date is more than 30 days after your start date.
- Small differences: IRD won’t charge or pay interest on under- or overpayments of $100 or less.
Late payment penalties are separate from interest and can apply if you miss an instalment.
How to prepare in year one
- Estimate your year-one profit every quarter.
- Set aside tax as you go. Move a percentage of every payment into a tax savings account. For a company, the tax rate is 28%; sole traders pay individual rates on a sliding scale — your accountant can give you a sensible percentage.
- Consider voluntary payments during year one to spread the load.
- Plan year two’s cash flow with both terminal tax and the first provisional instalment in it.
- Ask about tax pooling if you think you’ll underpay.
What if the bill arrives and the cash isn’t there?
Growth often means the cash went into stock, staff or equipment. Options:
- Talk to IRD early. Instalment arrangements are available, but you need a formal agreement for it to reduce penalties.
- Use a short-term facility. For businesses trading around six months or more, a line of credit or unsecured loan can pay IRD on time, repaid from trading.
- Consider a property-secured loan for larger amounts or if tax debt has already built up — it can pay out IRD debt entirely.
Our page on GST and provisional tax funding explains these options, and our guide to IRD tax debt options compares loans and instalment arrangements.
Questions to ask your accountant
Which provisional tax option suits a business growing as fast as mine? Should I make voluntary payments this year? Would tax pooling reduce my interest cost? And what percentage of each payment should I set aside for income tax and GST?
How Business Loanz helps
If your second-year tax bills have arrived before the cash has, send a 60-second enquiry. It doesn’t affect your credit score, and a lending specialist will walk through realistic options for your business.