Calculating provisional tax can be a complex process for many individuals who are self-employed or have other sources of income.
What is provisional tax?
Provisional tax is a form of income tax that is paid in advance of the end of a financial year. It is designed to help individuals and businesses spread the cost of their income tax payments over the year, rather than having to pay a lump sum at the end of the year.
Who needs to pay provisional tax?
Individuals who are self-employed or have additional sources of income such as rental properties or investments may need to pay provisional tax. Similarly, businesses that have to pay income tax may also need to pay provisional tax.
Calculating provisional tax
Calculating your provisional tax can be broken down into three basic steps:
- Estimating your total income for the year
- Calculating your provisional tax based on that estimate
- Paying your provisional tax in instalments throughout the year
Step 1: Estimating your total income for the year
In order to calculate your provisional tax you will first need to estimate your total income for the year. This includes income from your self-employment or other sources, as well as any other income you may have such as investments or rental properties.
Example: If you are self-employed and expect to earn $80,000 in a financial year, you would use this amount as your estimate of total income.
Step 2: Calculating your provisional tax
Your provisional tax is calculated based on your estimated total income for the year. You can use the IRD's provisional tax calculator to help you work out how much you need to pay.
Example: Based on an estimate of $80,000 of total annual income, the provisional tax due is $16,070.
Step 3: Paying your provisional tax
Provisional tax is paid in instalments throughout the year, usually in three instalments. The due dates for these instalments are:
| Instalment | Due date |
|---|---|
| First instalment | 28 August (for the period 1 April to 31 August) |
| Second instalment | 15 January (for the period 1 September to 31 December) |
| Third instalment | 7 May (for the period 1 January to 31 March) |
It is important to note that if you do not pay your provisional tax instalments on time, you may be subject to penalties and interest charges.
In conclusion
Calculating provisional tax might seem daunting at first, but by following these steps and using the IRD's provisional tax calculator, you can ensure that you pay the correct amount of tax in a timely manner.
