Provisional tax in NZ: how it works, the dates and a worked example

Short answer: provisional tax is income tax paid in instalments during the year instead of in one lump after it. You have to pay it once your residual income tax (RIT, your income tax for the year after PAYE and tax credits) was more than $5,000 last year. Most small businesses use the standard option: this year’s provisional tax is last year’s RIT plus 5%, split into three instalments. For a 31 March balance date the 2026-27 instalments are due on 28 August 2026, 15 January 2027 and 7 May 2027. Whatever you still owe once the return is done is terminal tax, due on 7 February the following year (7 April if you have a tax agent). The catch is a growing business: because the instalments are based on last year, a good year leaves a terminal tax bill and bigger instalments for the next year, landing close together. In the worked example below, an electrician pays $6,440 in January 2027 and then $15,780 within three weeks a year later.

Who has to pay it

• Individuals (sole traders, partners, people with rental or other untaxed income) whose RIT last year was more than $5,000.
• Companies and trusts on the same test.
• Not people whose income is all taxed at source (salary and wages through PAYE).

RIT is your tax for the year, not your profit. A sole trader with a $90,000 profit has an RIT of roughly $19,000 to $20,000 at current rates, before any credits. If you are not sure what last year’s RIT was, it is on your income tax assessment in myIR.

The four ways to work it out

Option	How the amount is set	Suits
Standard	Last year’s RIT plus 5% (or the year before plus 10% if last year’s return is not filed yet)	Most small businesses, especially steady or growing ones
Estimation	Your own fair and reasonable estimate of this year’s RIT; you can change it up to the last instalment	A year you expect to be clearly lower than last
Ratio	A percentage of the GST taxable sales in each GST return	GST-registered businesses with uneven income, under the ratio option’s RIT limit
AIM (accounting income method)	Worked out from your actual profit each period through IRD-approved accounting software	Businesses with lumpy income that want to pay as they earn

The standard option is the default, and it has an important protection: if you pay each instalment in full and on time, and your RIT is under $60,000, Inland Revenue does not charge interest on any shortfall until after the terminal tax date. With an RIT of $60,000 or more on the standard option, interest on a shortfall runs from the day after the last instalment. Estimating too low is riskier: interest can run from each instalment date.

The dates

For a 31 March balance date (most businesses), 2026-27 tax year:

What	Due
1st instalment	28 August 2026
2nd instalment	15 January 2027
3rd instalment	7 May 2027
Terminal tax for 2026-27	7 February 2028 (7 April 2028 with a tax agent)

If you are GST-registered and file six-monthly GST returns, you pay two instalments instead of three: 28 October and 7 May. A due date that falls on a weekend or public holiday moves to the next working day.

A worked example: an electrician in Hamilton

These figures are made up. Tama is a sole trader electrician with a 31 March balance date who does his own tax return.

2025-26 (year to 31 March 2026): RIT $18,400. The return is filed in June 2026.

2026-27 instalments on the standard option: $18,400 × 1.05 = $19,320, so three instalments of $6,440 on 28 August 2026, 15 January 2027 and 7 May 2027.

2026-27 turns out busy. A new builder client keeps Tama on two housing jobs, and his RIT for the year comes to $26,000. The instalments only covered $19,320, so:

• Terminal tax: $26,000 − $19,320 = $6,680, due 7 February 2028 (in practice Tuesday 8 February, because Waitangi Day is observed on Monday the 7th that year). Because his RIT is under $60,000 and every instalment was paid on time, no interest is charged on it before then.
• 2027-28 instalments are now based on the busy year: $26,000 × 1.05 = $27,300, three instalments of $9,100 (28 August 2027, 15 January 2028, 7 May 2028).

Put January and February side by side:

	January	February	Total
2027	$6,440 (2nd instalment)	none	$6,440
2028	$9,100 (2nd instalment)	$6,680 (terminal tax)	$15,780

That is $15,780 out of the bank in about three weeks (in 2028, 15 January falls on a Saturday, so that instalment is due on Monday 17 January), in the quietest months of the year for many trades, and it is the result of a good year. The profit was there; the cash was not set aside for it. Why profit doesn’t always mean cash covers the same gap from the other side.

What would have helped: setting aside for the year Tama was actually having, not last year’s. $19,320 ÷ 12 = $1,610 a month covers the instalments. Once the busy year was clear (say by November 2026, from the year-to-date profit), raising that to about $26,000 ÷ 12 = $2,167 a month would have had the terminal tax ready. Paying some of it early, as a voluntary payment, is also allowed and takes the pressure off February.

When to consider the estimation option

Estimation makes sense when you are confident this year will be lower than last: you have lost a big client, stopped trading for part of the year, or last year had a one-off. You then pay on your estimate instead of last year plus 5%.

The risk is getting it wrong. If your final RIT is higher than the estimate, interest can apply from each instalment date on what you underpaid, and the $60,000 protection above does not apply. An estimate has to be fair and reasonable at the time you make it, so keep a note of how you worked it out. If the year was going to be higher, the standard option is usually the better choice: you pay less during the year and no interest before the terminal tax date (under $60,000 RIT).

Watching it in Xero

Xero does not tell an owner what their RIT will be, but the figures that drive it are there:

1. Accounting › Reports › Profit and Loss, set to this financial year to date and compared with the same period last year. If net profit is running well ahead, this year’s RIT will be too, and the instalments based on last year will not cover it. Xero Profit and Loss by month shows the setup.
2. Record each instalment when you pay it. For a company, code it to an income tax account on the Balance Sheet (often called Provisional Tax Paid or Income Tax), not an expense. For a sole trader, income tax is personal, so a payment from the business account is usually coded to drawings. Ask your accountant which accounts they want, so the figures tie up at year end.
3. Keep the money separate. A savings account holding GST and income tax, topped up every week or month, is the simplest protection. How much to set aside for tax works out the percentages, and the cash runway calculator shows how long the rest lasts.

GST is separate from provisional tax (unless you use the ratio option, where they are paid together). Xero GST return in New Zealand covers filing GST from Xero.

If you can’t pay an instalment

Pay what you can by the due date and contact Inland Revenue before the date passes, not after. You can ask for an instalment arrangement in myIR, and late payment penalties stop from the date one is agreed. Can’t pay your tax bill on time has the steps for New Zealand, Australia and the UK side by side.

Common mistakes

• Treating last year’s tax as this year’s. On the standard option, the instalments follow last year. A growing business needs to set aside more than it is asked for.
• Forgetting the first year. In the year your RIT first goes over $5,000, there were no instalments, so the whole year’s tax is due as terminal tax, often near the first instalment for the next year.
• Using profit as the threshold. The $5,000 test is on tax (RIT), not on profit or sales.
• Coding provisional tax as an expense. It is a tax payment, not a cost of running the business, and coding it to expenses understates profit.
• Estimating low to ease cash flow. It can bring interest from the first instalment date if the year turns out higher.

Common questions

What is provisional tax in NZ? Income tax paid in instalments during the year, instead of all at once after the return. It applies once your residual income tax for the previous year was more than $5,000.

How is provisional tax calculated? On the standard option, it is last year’s residual income tax plus 5%, split into equal instalments. If last year’s return is not filed yet, it can be the year before plus 10%. Other options are your own estimate, a ratio of GST sales, or AIM through approved accounting software.

When are provisional tax payments due? For a 31 March balance date: 28 August, 15 January and 7 May. Six-monthly GST filers pay twice, on 28 October and 7 May.

What is terminal tax? The balance of the year’s income tax once the return is done: your RIT less the provisional tax you paid. It is due on 7 February after the end of the tax year, or 7 April if you have a tax agent with an extension of time.

Do I pay interest if my provisional tax was too low? On the standard option, if you paid every instalment on time and your RIT is under $60,000, no interest is charged before the terminal tax date. Above $60,000, or on the estimation option, interest can apply on the shortfall from earlier dates.

Is provisional tax the same as GST? No. GST is the 15% on your sales, paid with each GST return. Provisional tax is income tax on your profit. They are only paid together on the ratio option.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and the same month last year, cash in the bank, who owes you and bills due soon. It does not work out your provisional tax, but seeing profit running ahead of last year every week is the early warning that this year’s instalments will not cover this year’s tax. It asks Xero for read-only access, and there is a 14-day free trial with no card.