A guide to income tax for business owners

We’ve built this article around the questions on income tax, provisional tax, and terminal tax we frequently get from new business owners.​

The moment it’s anticipated that you’ll pay more than $5,000 in tax per year, you enter the IRD’s provisional tax regime.​

Provisional tax is a method in which you pay your current year’s tax as you go. It’s designed to help businesses ease cash flow by prepaying smaller amounts throughout the year instead of a giant lump-sum.​

Back when you were a “normal” employee, your employer took responsibility for sending your tax to the IRD every pay period. It’s what we call Pay As You Earn (PAYE) tax.​

When you’re instead receiving profits from your business, there are two drawbacks to you simply paying the full amount of tax at the end of the financial year:​

Provisional tax is the government’s answer. You don’t need to pay tax every month, and you don’t need to come up with a lump sum in April. Instead, you pay your tax in two or three instalments, along with a “wash-up” in April (called terminal tax, which we’ll cover later on).​

The amount you pay in tax is based on what you’ve paid previously, along with a small increase. It’s the most common and recommended method, as all calculations are handled by the IRD.​

You estimate your tax for the year and make payments accordingly. If your estimate is incorrect, the IRD may well charge you interest and short-fall penalties.​

You prepare a mini set of financial records and then pay your provisional tax throughout the year at the same time as your GST payments. Most often, these GST returns are filed every two months.​

Payments are based on a percentage of your GST-taxable revenue. It’s a rarely-used method that requires you to specifically inform the IRD via myIR, in writing, or a phone call. If you choose this method, it can only come into effect on the first day of the next income year (so you can’t use it retroactively).​

The IRD estimates provisional tax based on the most recent tax return filed. Let’s take the 2025 tax year as an example:​

Once the 2025 provisional tax amount is known, it needs to be paid in three equal instalments (or two if you’re on six-monthly GST). These are the provisional tax dates: ​

The main benefit of this method is that if you make these payments in full and on time, and your tax bill is under $60,000, the IRD will not charge interest or penalties.​

You advise Inland Revenue of your expected tax charge for the year. This is usually estimated by you based on profit and income expectations. This estimation is paid in three equal instalments and a wash-up, as with the Standard method.​

If your actual tax bill turns out to be higher than your estimate, the IRD is likely to charge interest and penalties. For this reason, we prefer the Standard method.​

This third provisional tax option is permitted if you (or your accountant) uses accounting software and you have less than $5 million turnover each year. AIM requires the calculation of year-to-date profit with the tax thereon paid every two months. Calculations should consider depreciation, stock on hand, shareholder salaries, and other non-cash items impacting profit. ​

This best suits highly seasonal business activities such as farmers and businesses in holiday destinations – tax is paid only when you make a profit.​

The IRD works out your ratio percentage – not you or your accountant. The easiest way to explain the calculation is to provide an example:​

Tax bill for year ended 31 March 2024 – $46,000
Total GST-able income for the year ended 31 March 2024 – $920,000 ​

The ratio percentage is 20%  [$46k divided by $920k]. ​

GST sales for the two months ended 31 July 2024 – $84,000
Provisional tax payment is $16,800 [20% of $84,000]​

GST sales for the two months ended 30 September 2024 – $23,000​

Provisional tax payment is $4,600 [20% of $23,000]​

…and so on.​

If 2024 is the first year you’re operating (year ended 31 March 2024), you haven’t paid tax for a while. Suddenly you have to pay for 2024 and prepay 2025 – all within ten months.  ​

Assuming you have a March year-end and you don’t file GST returns every six months, let’s see what your first year in business will look like:​

From business start date to July 2024 – no tax paid    ​

August 2024 – first prepayment of 2025 (P1)       ​

January 2025 – second prepayment of 2025 (P2)       ​

April 2025 – all your tax for the 2024 year in one lump sum       ​

May 2025 – third prepayment of 2025 (P3)    ​

At Beany, we can provide you with the expected amounts and the due dates. The trick is to get your financial information into us as quickly as possible so you have plenty of time to plan for tax payments.​

It’s the final payment you make at the end of a tax year, after any provisional payments. ​

Your income tax is based on your income, which could include wages, rental income, business profit, shareholder salary, interest, and dividends.​

If you’re only earning income from wages and interest, you probably don’t need to file a personal tax return. The IRD will work it out for you and send a bill if necessary.​

After tax has been calculated on your income, it can be reduced through:​

Once all of these are deducted, we arrive at your terminal tax.​

This depends on what method you use to calculate provisional tax, your balance date, and whether you are GST registered.​

Payments are due with each GST return.​

For those who have an Extension of Time (EOT), the final tax payment is due in April the following year.​

If you don’t have an EOT, terminal tax is due in February the following year.​

If you’re a Beany client, you’ll see upcoming payments on your Beany page, so you don’t need to memorise those dates!​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.​

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Register today.​