Provisional tax: cash planning so the instalments never catch you short

Provisional tax is a sensible idea that causes a lot of stress. Instead of paying a year’s income tax in one lump after the year ends, you pay it in instalments during the year. The trouble is that the instalments arrive on fixed dates, and fixed dates don’t care whether you’ve just had your best month or your worst. This guide explains who pays, when, how much — and how to make sure each instalment is sitting ready before it’s due.

Who has to pay provisional tax?

Inland Revenue’s rule is straightforward: you’ll pay provisional tax if you had to pay more than $5,000 tax at the end of the year from your last return. That “tax at the end of the year” is your residual income tax (RIT) — the income tax left to pay after tax credits and amounts already deducted, such as PAYE on wages.

Many owners first meet provisional tax in their second or third year of trading, when profits grow past the threshold. The first year it applies can be particularly painful because you may be paying last year’s terminal tax and this year’s first instalments close together.

When are the instalments due?

For a 31 March balance date using the standard or estimation option, Inland Revenue’s IR289 guide sets three instalments:

Instalment	Due date
First	28 August
Second	15 January
Third	7 May

Terminal tax — any balance left after the year’s assessment — is normally payable by 7 February in the next year — or by 7 April when you’re linked to a tax agent who holds an extension of time. Inland Revenue’s 7 February page noted that because 7 February 2026 fell on a Saturday, that year’s date moved to Monday 9 February.

Other options and balance dates have different schedules. The ratio option and the accounting income method (AIM), for instance, use more frequent instalments linked to GST periods or to your accounting software. Confirm your dates in myIR.

Which calculation option should I use?

The IR289 guide sets out four options:

Option	How it works	Suits
Standard	Last year’s RIT plus 5% (or the year before’s plus 10%)	Stable businesses
Estimation	Your own estimate of this year’s RIT	Businesses whose income is changing
Ratio	A percentage of GST taxable supplies	GST-registered businesses with steady margins
AIM	Payments based on actual income through approved software	Businesses with uneven income

The standard option is the default and the simplest. But if your profit is falling, standard may make you pay more than you’ll end up owing; if it’s rising fast, you may build up a large terminal tax bill. Talk to your accountant about which option fits your trajectory. The IR289 guide also describes interest relief for some standard-option taxpayers with RIT under $60,000 — your accountant can confirm whether it applies to you.

Why does provisional tax create cash crunches?

Three reasons come up repeatedly:

1. Timing. The 15 January instalment lands in the middle of the summer holidays, often alongside a GST payment for the period ending 30 November — also due 15 January.
2. Growth. A business growing quickly may owe much more than the standard option collected, leading to a large terminal tax bill.
3. Mixing money. Tax money sits in the trading account and gets used for wages and stock.

Our GST cash buffer guide covers the GST side. The same set-aside principle works for provisional tax.

How do I set money aside for provisional tax?

A practical method:

1. Estimate this year’s tax with your accountant — or use last year’s RIT plus 5% as a starting point.
2. Divide by 52 to get a weekly figure.
3. Transfer that amount weekly into your separate tax account, alongside GST.
4. Review quarterly. If profits change, adjust the transfer.
5. Pay instalments from the tax account only.

If your income is very seasonal, weight the transfers toward your busy months rather than spreading them evenly.

What is tax pooling, and can it help?

Inland Revenue explains that tax pooling lets clients pay provisional tax to registered intermediaries, who deposit the funds into an account with Inland Revenue. Payments are treated as tax contributions from the date they enter the pool, until they’re transferred to the client’s account. Tax pooling can give flexibility on timing and help manage interest costs. Whether it suits you depends on your situation — your accountant is the best person to advise.

What if an instalment is due and the money isn’t there?

• Pay what you can on time. A partial payment reduces the overdue amount.
• Talk to your accountant about switching to the estimation option if income has dropped.
• Contact Inland Revenue or set up an arrangement in myIR. Interest is charged on overdue amounts.
• Consider funding. A short-term loan or business line of credit can bridge an instalment until trading catches up. For larger balances that have already become overdue, see business loans to pay IRD.

A quick, no-obligation conversation can help you weigh the options — you can start one here.

What happens in the first year provisional tax applies?

The first year can feel like paying tax twice. You may be paying terminal tax for the year just finished while the first instalments for the current year are also falling due. That isn’t a double charge — it’s two different years’ tax overlapping — but the cash impact is real. If your profit has just grown past the threshold, ask your accountant to map out the next 18 months of tax dates and amounts, then start your weekly set-aside straight away. Knowing the overlap is coming is half the battle.

How do provisional tax and GST dates line up?

For a March balance date business filing GST two-monthly, the year can include several tight moments where GST and provisional tax fall in the same month. The 15 January date is the clearest example, but the 7 May date also coincides with the GST period ending 31 March. Map your own dates on one calendar so the collisions are visible months ahead. If you find two or three crunch points, that’s a strong case for a revolving facility you can draw for a few weeks and repay.

What questions should I ask my accountant?

• Which provisional tax option suits our profit trend this year?
• Is our current estimate realistic given year-to-date trading?
• Would tax pooling help us manage timing or interest?
• Are we eligible for any interest relief on our instalments?
• How much should we transfer to the tax account each week?

Illustrative example: a growing Christchurch builder

This example is illustrative only. A Christchurch residential builder doubles turnover in a year. Using the standard option, its instalments are based on the previous, smaller year, so a large terminal tax bill builds up. The accountant suggests switching to estimation for the following year and setting aside a fixed weekly sum. When the terminal tax falls due in a slow month between projects, the builder bridges it with a short-term loan repaid from the next progress payment, then keeps the weekly transfers going so the next year’s instalments are covered as they fall.

What should I do this month?

• Find your next provisional tax date in myIR and diary it with a two-week reminder.
• Ask your accountant for this year’s estimated RIT.
• Set a weekly transfer to your tax account.
• Add your myIR summary to your funding readiness pack.

When the instalment is bigger than the balance

Growth, a slow quarter or a surprise assessment can leave a provisional tax instalment uncovered. If that’s where you are, a short enquiry is the quickest way to see what’s possible. It takes about a minute and there’s no credit check when you first enquire. Your details aren’t scattered across a list of lenders — one team reads them and a real person calls you. Please share the real figure from myIR so we can find the right fit first time.

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