Understanding tax payments can feel tricky so we’ve broken down the basics of Provisional Tax and Terminal Tax. These two tax types are essential to managing your business finances and understanding them can help you avoid the infamous ‘second year tax shock’ that many new business owners face.
Provisional Tax is an advance payment on the income tax you expect to pay at the end of the tax year. It is essentially a way for the IRD to collect tax throughout the year rather than waiting for the end of the tax period. Provisional tax payments are typically made in three instalments throughout the year, helping to spread the tax burden and manage cash flow. For example, businesses and individuals with a March balance date would pay provisional tax on the 28th of August, 15th January and 7th of May each year. These tax payments are for the period 01/04/2023 to 31/03/2024.
On the other hand, Terminal Tax is the final tax payment made at the end of the tax year, which essentially ‘settles the score’ with the Inland Revenue Department (IRD). It’s calculated by subtracting the total provisional tax paid during the year from the total income tax due for that year. If you’ve paid too much provisional tax, you’ll get a refund; if you’ve paid too little, you’ll have a terminal tax bill to pay. For example, businesses and individuals with a March balance date would have terminal tax due on the 7th of April 2024 for the prior financial year.
The Second Year Tax Shock
New business owners often experience a ‘second year tax shock’. In the first year of operation, businesses are not required to pay provisional tax. However, in the second year, not only are you required to pay provisional tax for the current year, but you may also have a terminal tax bill for the previous year. This can result in a significant financial burden, often catching new business owners off-guard.
Mitigating the Second Year Tax Shock with Personalised Tax Estimates
Fortunately, there are strategies to mitigate this second-year tax shock, and one such method is through personalised tax estimates. Rather than relying on standard IRD calculations, which are often based on previous years’ earnings and may not accurately reflect your current income, personalised tax estimates consider your unique business circumstances.
Our personalised tax estimates service provides a more accurate prediction of your tax obligations, helping you budget more effectively and avoid unexpected tax bills. We take into consideration changes in business income, expenses, and any tax-deductible items that may impact your tax obligations.
By providing a more accurate estimate of your provisional and terminal tax obligations, we can help you manage your cash flow more effectively, spread your tax payments more evenly throughout the year, and avoid the second-year tax shock.
Understanding the difference between provisional tax and terminal tax, and preparing for the second-year tax shock, is crucial for new business owners. By leveraging personalised tax estimates, you can ensure a smoother financial journey, allowing you to focus on what you do best – growing your business. Contact us today!