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Terminal Tax and Provisional Tax
(aka “how come I have so much to pay?”)

 

If you earn income, you have to pay tax on it: Income tax.
 
What’s scary is that this income tax is paid both in arrears and in advance, which in the second year of trading can cause serious cashflow issues!
 
What’s the difference?
Each year of trading, your income tax is calculated and submitted to the IRD.  This tax calculation is called Terminal Tax; it is the final tax calculation on that income. Technically, you are paying this tax in arrears, as you have already earned the income that the tax is calculated on.
 
Now that the IRD know how much Terminal Tax you have to pay for the year just gone, they estimate what your Terminal Tax will be for the next year (by adding 5% to it), and they want you to pay this tax in advance. This estimate of your future Terminal Tax bill is called Provisional Tax. Depending on when your previous year’s tax return is filed, this Provisional Tax can be paid over 1, 2 or 3 instalments over the coming year.
 
When the Terminal Tax is calculated for the next year, the Provisional Tax payments made throughout the year are deducted from the final bill.
 
Generally the Provisional Tax estimate is about right, and you will probably have just a small amount of Terminal Tax remaining to pay or be refunded.  If there is going to be a big difference however, we need to discuss it.  There are penalties if the Provisional Tax estimate is substantially wrong. So if you are expecting to earn way more or way less than you did last year, let us know.
 
And if you’re wondering why April and May hit you so hard, it’s because for most of you, Terminal Tax is due in April, and the last of the Provisional Tax payments is due in May.
 
We have a Top Tax Tips card at reception, why not grab one next time you’re in. The number 1 tip: Open a separate bank account and transfer at least 20% of your income regularly to cover your tax.


If you ever have any tax concerns, please get in touch with one of the team, as we are here to help!

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