If you’re a sole trader, chances are you’ve received an unexpected tax bill at some point. Calculating your own taxes can be complicated, and it’s easy to get it not quite right.
To help stop people from being hit with massive tax bills at the end of every tax year, Inland Revenue uses a provisional tax system.
The tl;dr is that if you owed more than $5,000 in residual income tax (RIT) for the previous financial year, you are required to pay your income tax for the current financial year in regular instalments.
In theory, provisional tax helps you stay on top of your income tax by spreading payments out. But while it can prevent a huge final tax bill, it can be hard to plan for and manage.
So, that’s why we’ve created this provisional tax guide. We’ll explain what provisional tax is, how it works, who needs to pay it, and how to get it sorted. Easy!
What is provisional tax?
Provisional tax is a tool Inland Revenue uses to prevent huge tax bills at the end of the financial year. If you have a residual income tax bill of over $5,000, you’re required to pay provisional tax across the next financial year.
💡 Note: Provisional tax isn’t a way to pay off your tax bill from a previous financial year – instead, it splits up your estimated tax bill for the current financial year. If you have an outstanding tax bill, you’ll still need to pay that off!
It’s important to note that provisional tax is not a separate or additional tax – it’s the exact same income tax you’d pay anyway, just split into instalments. The amount of each instalment is generally calculated based on previous year’s earnings, or your estimation of your earnings in the current financial year.
💡 Note: when we say “your estimation”, you do actually have to estimate. You can’t just say you’re going to earn $0 and then just not pay tax. That’s not how anything works.
If you earn irregularly, or you had a one-off increase in income in the previous financial year (good for you!), this could prove a problem – you may be required to pay more in instalments than you actually owe.
Who needs to pay provisional tax?
If you owe $5,000+ in residual income tax (essentially, tax not paid automatically throughout the financial year, like PAYE or withholding tax) after filing your tax return, then you’ll have to pay provisional tax in the next financial year. That $5,000 figure is what’s known as the provisional tax threshold.
Being subject to provisional tax means that you will need to make payments on a set schedule to ensure you’re paying your taxes in advance.
Be careful here though – if you underpay your provisional tax it may result in fines and penalties.
When are Provisional Tax payments due?
Great question, slightly complicated answer. Your provisional tax due dates will depend on two things:
- which payment option you choose (see below) and
- if you’re GST registered
The four payment options you can choose from are:
- The standard option;
- The estimation option;
- The ratio option; and
- The accounting income method (AIM)
The standard option
The standard option is the default option if you choose not to use the other options. It’s also often the better option for those who know their income will increase over the next year.
Inland Revenue will automatically calculate this for you, but in general, using the standard option, you:
- Start with your residual income tax amount
- Add a 5% uplift. If you haven’t filed your previous year’s returns, then it’s a 10% uplift
- Divide the resulting amount by the number of set instalments.
- You’ll usually have three instalments, but if you’re registered for GST and file 6-monthly returns, then you’ll only pay two instalments.
Example: how to calculate your provisional tax
Aaron runs a small florist business as a sole trader. Last financial year, his residual income tax bill was $8,000 – that’s the tax he owed after his return was assessed, on top of anything already deducted at source.
Because Aaron filed on time, Inland Revenue adds the standard 5% uplift: $8,000 × 1.05 = $8,400. That’s his provisional tax for the year.
Split into three instalments, Aaron pays $2,800 on 28 August, $2,800 on 15 January, and $2,800 on 7 May. If his income jumps this year (eg. if his flower stall goes Instagram-famous), he could owe more come tax time – but if it drops, the estimation option might suit him better.
💡 If you use Hnry, we pay your tax as you earn – so you don’t have to worry about instalments, due dates, or 5% uplifts. Learn more.
The estimation option
If you think your income will decrease over the next year, the estimation option could be right for you.
To use the estimation option, add up all the taxable income you think you’ll receive in the next year (including PAYE and self-employed income), minus any deductions you can claim, calculate the tax on that amount and subtract any PAYE and other tax credits you’re entitled to.
The number you’re left with will be your estimated residual income tax for the financial year – which is also the amount of provisional tax you have to pay. Divide this amount by the number of set instalments (like with the standard option, you’ll usually have three).
As per the Inland Revenue website, “if you do not think you’ll have any residual income tax to pay, you can estimate your provisional tax at $0.”
Payment dates for the standard and estimation options:
| Installment | Due Date |
|---|---|
| 1 | 28 August |
| 2 | 15 January |
| 3 | 7 May |
💡 Remember, Inland Revenue is pretty strict around these dates. If you fail to pay the right amount of provisional tax exactly when it’s due, you could face fines and/or penalties.
The ratio option
If your income is seasonal or uneven throughout the year, the ratio option could be right for you.
There are some fairly strict criteria around who can and can’t use the ratio option. To use the ratio option, you must:
- Have been registered for GST for the whole of the previous tax year, and at least part of the tax year before that (!)
- Have a RIT between $5,000 and $150,000 from the previous financial year.
- File your GST returns monthly or 2-monthly.
- Not have a partnership business structure.
- Have a ratio percentage (calculated by Inland Revenue) between 0% - 100%.
Using the ratio option, you’ll pay provisional tax in six instalments according to the schedule below.
Payment dates under the ratio option
| Installment | Due Date |
|---|---|
| 1 | 28 June |
| 2 | 28 August |
| 3 | 28 October |
| 4 | 15 January |
| 5 | 28 February |
| 6 | 7 May |
If you decide to use the ratio option you must let Inland Revenue know before the start of the tax year.
It’s also important to remember that Inland Revenue will calculate the ratio percentage for you by using the information they have from your GST returns and residual income tax – so this option will only work when your tax and GST returns are up to date!
The accounting income method (AIM)
A less popular option is the accounting income method (AIM). The idea behind AIM is to prevent businesses with irregular or unpredictable income from having to make large payments at the end of the tax year.
Using the accounting income method, you only pay provisional tax when your business earns a profit. AIM uses an AIM-capable accounting software to automatically calculate your provisional tax payments for you, so this method only works as long as your financial records are up-to-date.
The due dates for AIM provisional tax payments are usually aligned with your GST due dates. If you file monthly GST returns, you’ll pay these monthly. If you pay your GST every two or six months, then you’ll make 2-monthly instalment payments.
🔗 Want every Inland Revenue deadline in one place, not just provisional tax? Check out our Important tax dates for FY2026/27 for the full calendar.
How do I pay provisional tax?
You’ve settled on an option and worked out what you owe – so how does the money actually get to Inland Revenue?
The easiest routes are the same ones you’d use for any other tax:
- Internet banking – most banks have a “pay tax” or “pay Inland Revenue” option built into their website or app.
- Direct debit, which you can set up (or cancel) yourself in myIR.
- Credit or debit card, through myIR.
- Automatic payments, if you’d rather not think about individual due dates at all.
- In person at Westpac, or by phone, if you’d rather talk to someone.
If you genuinely can’t pay on time, you can get in touch with Inland Revenue about potentially paying in instalments before the due date. Otherwise, you may end up with late payment penalties.
Of course, if Hnry’s already paying your taxes as you earn (more on that below), you can skip all the faff – we sort it all for you.
Does provisional tax work differently for sole traders?
Not really – the same $5,000 threshold and the same four options apply whether you’re a sole trader, a company, or a trust. What’s different is how often sole traders run into it.
If you’re an employee, your employer deducts PAYE from every pay cheque, so Inland Revenue’s already collecting your income tax in real time. Sole traders and other self-employed people don’t have that automatic deduction (unless they’re using Hnry of course), so nothing goes towards their self-employed tax bill until they file their return. Because of this, they’re more likely to end up with a $5,000+ tax bill and need to pay provisional tax.
🔗 For the bigger picture on managing your tax as a sole trader, check out our tax 101 article.
Frequently asked questions
What is provisional tax?
Provisional tax is Inland Revenue’s way of spreading your income tax out across the year, rather than landing you with one huge bill at the end. It’s not a separate tax – it’s the exact same income tax you’d pay anyway, just split into instalments. If your residual income tax was over $5,000 last financial year, you’ll need to pay it.
Is provisional tax the same as income tax?
Yes – provisional tax isn’t an extra tax on top of what you already owe. It’s your income tax for the current financial year, paid in instalments instead of one lump sum.
What is the provisional tax threshold?
The provisional tax threshold is $5,000. If your residual income tax comes to more than that after filing your return, Inland Revenue will require you to pay provisional tax the following financial year.
How is provisional tax calculated?
It depends which of the four options you use. Under the standard option, Inland Revenue takes your previous year’s residual income tax and adds a 5% uplift (10% if you filed late), then splits that across your instalments. The estimation, ratio, and AIM options each calculate it differently – see the sections above for the full breakdown.
When do you have to pay provisional tax?
That depends on your payment option and whether you’re GST registered. Under the standard or estimation options, most people pay in three instalments – 28 August, 15 January, and 7 May. The ratio option splits payments into six instalments across the year instead.
What happens if I can’t pay my provisional tax on time?
You can get in touch with Inland Revenue about paying in instalments before the due date. Underpaying or missing a due date can result in fines and penalties, so it’s worth sorting sooner rather than later.
Using Hnry with provisional tax
Do Hnry users have to worry about provisional tax? Ha, NO!
That’s because Hnry’s tax automation system is basically provisional tax maxxed out. We don’t wait for your provisional tax deadlines – instead, we pay your taxes as you earn. We’re tax nerds, submitting your homework for you before the deadline.
Best of all, we’re more likely to get it accurate. If the amount you earn fluctuates from month to month, Hnry automatically adjusts your income tax rate as you go to ensure that you pay the exact right amount of all your taxes – whenever you get paid.
That means:
- No more under or over-paying your income tax.
- No more worrying about your other taxes like GST or ACC levies – Hnry takes care of all your taxes for you, and files all your returns on your behalf
- No more eye-watering provisional tax payments, and no more uncertainty about how much money to hold back for taxes
- No need to pay for a separate accountant and multiple software tools to handle your financial admin – Hnry is an all-in-one accounting service.
Our team of accountants and tax experts, and our award-winning software, have got your back.
DISCLAIMER: The information on our website is for general educational purposes only. It doesn’t cover all situations and circumstances, and shouldn’t be taken as direct tax advice. If you’re looking for specific help with your taxes, join Hnry and our team of experts can provide you with assistance tailored to your business needs.