The second-year provisional tax shock, and how to soften it

Mr has a name for it: the “welcome to success” bill. You start a business, you work hard, the first year goes well — and then, a year or so later, two tax bills arrive within months of each other. It’s not a penalty or a mistake. It’s how New Zealand’s provisional tax system works when you go from no tax history to a profitable one. Once you see the pattern, you can plan for it.

How does provisional tax normally work?

If your residual income tax (the income tax left to pay after things like PAYE and tax credits) was more than $5,000 last year, Inland Revenue expects you to pay this year’s tax in instalments during the year. That’s provisional tax.

Under the standard option, this year’s provisional tax is generally last year’s residual income tax plus 5%. For a 31 March balance date, it’s paid in three instalments: 28 August, 15 January and 7 May (or two instalments, 28 October and 7 May, if you file GST six-monthly). Whatever’s left after your return is filed — or any refund — is settled after year-end.

Where does the “shock” come from?

It’s the first time you cross the threshold. Here’s the typical sequence for a sole trader or company with a 31 March balance date:

Period	What happens
Year 1 (first profitable year)	No earlier tax bill over $5,000, so no provisional tax instalments are required. Profit builds up, and so does the tax on it.
After year 1 ends	Return filed. The whole of year 1’s tax is now due as end-of-year tax — generally by 7 February of the following calendar year, or 7 April with a tax agent’s extension.
Year 2	Because year 1’s residual income tax was over $5,000, provisional tax instalments for year 2 now apply — based on year 1’s tax plus 5% under the standard option.

So in roughly the same stretch of months, you’re paying all of year 1’s tax and instalments towards year 2’s tax. If year 1’s profit wasn’t set aside, that can feel like being hit twice.

Depending on timing and your agent’s extension, the overlap can be sharp. Your accountant can map your exact dates, and the tax due dates tool shows the standard instalment and end-of-year dates.

An illustrative example

All figures are invented.

A Christchurch web developer goes out on her own in April 2025. By March 2026 she’s had a strong first year as a sole trader. She didn’t pay provisional tax during the year, because she had no previous year’s tax over $5,000.

• Her 2026 return shows a sizeable tax bill on her first year’s profit. As she uses a tax agent with an extension, it’s due on 7 April 2027.
• Her 2027 provisional tax under the standard option is based on her 2026 residual income tax plus 5%, paid on 28 August 2026, 15 January 2027 and 7 May 2027.

Her accountant, however, files her 2026 return early, in mid-2026, so the 2026 figure is known before the first instalment. Between August 2026 and May 2027 she faces three provisional instalments plus the 2026 end-of-year tax. If she’s been setting aside a slice of every invoice since April 2025, that’s fine. If not, it’s a crunch.

How to soften it

1. Set aside tax from your first profitable month

The simplest protection. Open a separate account and move a fixed proportion of every payment you receive into it. Ask your accountant what proportion suits your expected profit and tax rate. It feels slow at first; it feels brilliant in February.

2. Make voluntary payments

You can pay towards your tax before it’s due. Voluntary payments during year 1 can reduce what’s owing later and may reduce use-of-money interest. Ask your accountant how and when to pay them.

3. Choose the right option for year 2

Talk to your accountant about the four options:

• Standard — simple, based on last year plus an uplift; suits steady or rising income.
• Estimation — you estimate this year’s tax yourself; useful if year 2 will be clearly lower than year 1, but you need to estimate fairly.
• Ratio — linked to GST turnover, with six instalments; suits some businesses with uneven income (eligibility rules apply).
• AIM — pay only when the business makes a profit, through compatible software; suits uneven or growing profits.

IRD’s guide also notes a “safe harbour” for many standard-option taxpayers with residual income tax under $60,000, who are generally only charged use-of-money interest if they haven’t paid in full by their end-of-year due date. That’s worth understanding with your accountant before you choose.

4. Forecast it

Put every tax date in a twelve-month cash flow forecast — see our forecast guide. The second-year shock is much less shocking when it’s a line on a sheet you’ve been looking at for months.

5. Don’t let growth hide it

If your business is growing quickly, the tax effect compounds. Read growing too fast: why profitable businesses run out of cash.

What if the bill is already here and I can’t pay it?

You have options, and the worst one is doing nothing.

• File on time anyway. Filing and paying are separate obligations.
• Talk to IRD before the due date. An instalment arrangement is often possible — see what’s an instalment arrangement and will a lender care?
• Consider funding. A one-off catch-up tax bill is a very common and legitimate reason to borrow. Lenders understand the second-year pattern, especially when your trading shows the profit that caused it. Funds can often be paid straight to IRD.

Late payment penalties start the day after the due date — 1% the next day and a further 4% on the seventh day — and use-of-money interest applies. So if funding is the answer, arrange it before the due date. If you’d like to explore it, send a short enquiry — there’s no credit check to ask.

How lenders see a second-year tax bill

Mr’s experience is that lenders tend to view it kindly, if:

• the profit that caused it is visible in your bank statements and return;
• you’re current on GST and any employer deductions;
• you’ve contacted IRD or have a plan;
• your ongoing trading comfortably covers future instalments.

It’s a “success problem” — and lenders know the difference between that and a business in trouble. More on how provisional tax affects your loan application.

Your quick checklist

• Know whether your last return’s residual income tax was over $5,000.
• Know your provisional tax option and dates.
• Know your end-of-year tax due date (7 February, or 7 April with an agent’s extension).
• Separate tax account set up and funded every week.
• Twelve-month forecast including every tax date.
• Plan agreed with your accountant before the first instalment.

Questions to ask your accountant this month

Take these to your next meeting:

1. Was my residual income tax over $5,000 last year, and am I now a provisional taxpayer?
2. Which provisional tax option am I on, and is it still the best fit?
3. What are my exact instalment and end-of-year due dates for the next 18 months?
4. How much should I set aside from each payment I receive?
5. Would voluntary payments now reduce interest later?
6. If my income is dropping this year, should I use the estimation option — and what are the risks?
7. Could AIM suit my business and software?

Ask Mr about your tax-year crunch

If the second-year bill has snuck up on you, you’re far from alone. Tell us what’s due, when, and how your business is trading now. Asking doesn’t touch your credit file, your details stay with one person rather than being spread to many lenders, and a real person will help you work out whether funding, an IRD arrangement, or a bit of both makes most sense.

Please include the tax amount and due date as shown in myIR on the form — it lets us aim for a solution that lands before the deadline. See if your business qualifies.