Is your income down this year? You might be able to reduce your 3rd provisional tax payment
If your business hasn't performed as well this year, there's a silver lining: you might not need to pay as much in your third provisional tax instalment due on 7 May. However, to adjust your payment safely and avoid any potential interest or penalties from Inland Revenue (IRD), it's crucial to review your financials and calculate the correct amount of tax to pay (if any) promptly.
Understanding Provisional Tax
Provisional tax is a way for businesses in New Zealand to pay their income tax throughout the year, rather than in a single lump sum at the end. If your income tax bill exceeded $5,000 last year, the IRD expects you to pay tax in instalments for the following year. You can learn more around the different provisional tax dates here.
What is Residual Income Tax (RIT)?
Residual income tax (RIT) is the amount of tax you owe on your taxable income after accounting for any PAYE deducted and other tax credits you're entitled to (excluding Working for Families). It essentially represents the tax liability on income that hasn’t had tax deducted during the year at source. You can find your RIT in your most recent tax return.
Safe Harbour Provisions
If you're using the standard method and your RIT is less than $60,000, the safe harbour rules mean you won’t be charged use-of-money interest (UOMI) on underpayments — as long as you pay the full amount by your terminal tax date (usually 7 April of the following year).
⚠️ However, late payment penalties (LPPs) can still apply if instalments are not made on time.
Important: If your RIT exceeds $60,000, the safe harbour no longer applies — and all remaining tax must be paid by 7 May to avoid interest. This often catches people off guard, especially if their income has suddenly increased during the year. If you think your income may push you over the $60k threshold, it's critical to review your position now. More on the safe harbour rules in this blog post.
Why Would You Want to Estimate Down?
If your income is lower than last year, the standard method may have you overpaying. Estimating your provisional tax down can free up cashflow now — especially helpful if sales or profit have dipped.
But you do need to tread carefully. If you estimate too low and end up owing more than expected, IRD may charge interest and penalties. That’s why we recommend checking your performance before making any changes.
How to Check If Estimating Down Is a Good Idea
You can get a quick snapshot of how your business is performing compared to last year using Xero.
✅ How to Run a Profit and Loss Report in Xero
Go to Accounting > Reports
Select Profit and Loss
Set the date range with the drop down arrow next to the dates to:
Last Financial Year
Compare with: 1 year
Click Update
This will show whether your profit is tracking higher or lower than last year — a key indicator of whether estimating down might make sense. You may need to add back shareholder salaries, less any non-deductible expenses to get a more accurate picture.
What to Do Next
If your profit is significantly down, estimating your tax lower might be appropriate — but it's important to base that estimate on accurate forecasting and your overall financial position.
We can help you:
Review your year-to-date numbers in Xero
Forecast your likely income for the full year
Calculate a safe and reasonable estimate
File your updated estimate with IRD (if needed)
Plan ahead for the rest of the year to manage future tax payments
Need Help with Your 7 May Instalment?
If you think your business hasn’t earned as much this year and you're unsure what to pay, get in touch with us as soon as possible. That gives us time to properly review your figures and help you make an informed decision. You can choose to add on this service with the form below. Our annual tax review service incurs a one off charge of $300 + GST.