If your last tax return left you with more than $5,000 to pay, you are a provisional taxpayer this year. That means paying your income tax in instalments during the year, instead of in one sum after it ends.
For most businesses the next instalment is due on 15 January 2027. Here is how provisional tax works, how to choose the right method, and how to avoid paying interest.
Who has to pay provisional tax?
You pay provisional tax if your residual income tax (RIT) for the previous year was more than $5,000. RIT is the tax left to pay after PAYE and other credits are taken off.
It commonly applies to people with:
- self-employed or contractor income
- rental income
- partnership income
- overseas income
- company profits
In your first year in business you generally have no provisional tax to pay. The catch is that your first full tax bill and your second year’s provisional tax can fall due close together. Set money aside from day one.
Provisional tax dates for 2026-27
These dates apply if you have a 31 March balance date and pay in three instalments.
| Instalment | Due date |
|---|---|
| First | 28 August 2026 |
| Second | 15 January 2027 |
| Third | 7 May 2027 |
If you file GST six-monthly you pay in two instalments instead of three. Businesses using the accounting income method pay more often, in line with their GST periods.
The four ways to calculate provisional tax
| Method | How it works | Best for |
|---|---|---|
| Standard | Last year’s RIT plus 5%, in equal instalments. If last year’s return is not filed yet, RIT from two years ago plus 10%. | Steady or growing income |
| Estimation | You estimate this year’s tax and pay on that basis | Income that has dropped |
| Ratio | A percentage of your GST taxable supplies each period | Seasonal businesses filing GST monthly or two-monthly |
| Accounting income method (AIM) | Calculated from actual profit in approved software such as Xero | Small businesses with uneven profit |
Standard is the default and the simplest. Its weakness is that it assumes this year looks like last year.
Estimation lets you pay less if income falls. If your estimate is too low, Inland Revenue charges interest on the shortfall from the first instalment date. Use it with care.
Ratio is open to businesses with RIT between $5,000 and $150,000 that have been GST registered for the required period. Partnerships cannot use it. Applied correctly, it protects you from interest.
AIM means you pay only when your business makes a profit. It needs accurate, up-to-date bookkeeping in approved software.
How to avoid use of money interest
Inland Revenue charges use of money interest when you underpay. From 16 January 2026 the rate on underpaid tax is 8.97%. The rate it pays on overpaid tax is 2.25%.
That gap matters. Underpaying is expensive, and overpaying earns you little.
Three ways to stay out of trouble:
- Use the safe harbour. If your RIT is under $60,000 and you pay the standard method instalments in full and on time, interest applies only from your terminal tax date.
- Review before each instalment. Check your year-to-date profit before 15 January and 7 May. Adjust if the year is going better or worse than expected.
- Consider tax pooling. An approved tax pooling provider lets you buy tax that was paid on the original due date, at a lower cost than Inland Revenue’s interest.
What happens if you pay late?
A 1% late payment penalty applies the day after the due date. A further 4% applies if the amount is still unpaid after seven days. Interest runs on top.
If you cannot pay, contact Inland Revenue or your accountant before the due date. An instalment arrangement set up early costs far less than a missed payment.
Common provisional tax mistakes
- Spending the tax money, then scrambling in January when cash is tight after the holidays.
- Staying on the standard method in a year when profit has fallen sharply.
- Estimating low to help cashflow, then paying interest on the difference.
- Forgetting that shareholder salaries and drawings affect personal provisional tax as well. Drawings can also create deemed dividends.
Frequently asked questions
Is provisional tax an extra tax? No. It is your normal income tax, paid in advance. It is credited against your final bill.
Can I change methods during the year? In some cases, yes. Switching from standard to estimation is common, but the interest rules change when you do.
What if I overpay? You can have the overpayment refunded or carried forward to next year.
Need help with provisional tax?
The right method can free up cash, and the wrong one can cost you interest. Capital Hill’s tax team reviews your position before each instalment, and our bookkeeping service keeps your numbers current enough to use AIM.
Call 09 376 5400 or email info@capitalhill.co.nz before 15 January.
