Quick answer
In your first year in business there's usually no provisional tax, so the first year's income tax falls due as a single bill, generally on 7 February the following year. Because that year's tax was over $5,000, provisional tax for year two starts at the same time. The result is two years of tax being paid within a few months. Voluntary payments in year one, which may earn an early payment discount, spread the load.
Key points
- No provisional tax in year one under the standard, estimation or ratio options.
- Year one's tax is usually due by 7 February the following year, as a single payment.
- If it was over $5,000, year two's provisional tax instalments start straight away.
- Voluntary payments during year one can spread the cost and may earn an early payment discount.
Ask an accountant about the most common shock in a new New Zealand business and you’ll often hear the same answer: the second year’s tax. Nothing has gone wrong; the business is doing well. But for a few months it seems to be paying tax for two years at once. In a sense, it is.
Why does year two bring two tax bills?
The sequence runs like this for a business with a 31 March balance date that starts trading on 1 April:
- Year one (April to March). No provisional tax under the standard, estimation or ratio options, because there’s no prior year’s tax to base it on. Profit builds; no income tax is paid along the way.
- After year one ends. Your return is filed and the full year-one tax becomes payable, usually by 7 February the following year (or later with a tax agent’s extension).
- Year two (the following April to March). Because year one’s residual income tax was over $5,000, you’re now in provisional tax. Instalments for year two begin, on the standard option based on year one’s tax plus 5%.
So within roughly the same stretch of months you pay all of year one’s tax and two or three instalments of year two’s. Inland Revenue says it plainly: you may have to pay income tax for your first year at the same time as provisional tax for the second.
How big can it get?
Illustrative example. A Napier physiotherapy clinic, set up as a company, starts on 1 April 2025 and makes taxable profit of $120,000 in its first year. At the 28% company rate, year-one tax is $33,600.
| Payment | Due date | Amount |
|---|---|---|
| Year two provisional, instalment 1 | 28 August 2026 | $11,760 |
| Year two provisional, instalment 2 | 15 January 2027 | $11,760 |
| Year one tax (terminal) | 7 February 2027 | $33,600 |
| Year two provisional, instalment 3 | 7 May 2027 | $11,760 |
Standard option: $33,600 plus 5% = $35,280, split into three. Year one’s tax could move to 7 April 2027 with a tax agent’s extension. Assumes the return for year one was filed before 28 August 2026.
Between late August 2026 and early May 2027, the clinic pays about $68,900 of income tax, more than double a single year’s bill, on top of GST and its other costs. A business that hasn’t been setting aside since day one can find that very hard.
How do you soften the second-year squeeze?
Set aside from the first month. Treat income tax like GST: estimate the tax on each month’s profit and move it to a tax account. Even a rough 25–30% of profit (depending on your structure) is far better than nothing.
Make voluntary payments in year one. Inland Revenue lets you pay tax voluntarily during your first year to spread the cost, and you may get an early payment discount for doing so. Check the current conditions with your accountant.
Consider AIM. The accounting income method calculates provisional tax on actual profit as you go, through compatible software, so tax keeps pace with trading from the start. It’s open to individuals and companies with turnover under $5 million. Compare it with the alternatives in the four provisional tax options.
Use estimation if year two looks quieter. If year one included a one-off windfall, the standard option’s “last year plus 5%” may overshoot. Estimation lets you base instalments on your real expectations, at the cost of interest risk if you guess low.
Keep GST separate. It’s tempting to treat a healthy GST account as a buffer for income tax. Don’t; GST has its own dates and they keep coming. See how much GST to set aside.
Does the same thing happen if you change structure?
Something similar can. When a sole trader moves the business into a new company, the company starts with no tax history of its own, while the owner may still have personal provisional tax based on last year’s sole-trader profit. For a year or so, tax can be due in two places: the owner’s final sole-trader year and the new company’s first year. Your accountant can map out which entity owes what and when, and whether estimation makes sense for the personal instalments once the business income stops flowing to you directly.
What if the money still isn’t there?
Inland Revenue would much rather hear from you before the due date than after. If you can’t pay in full, an agreed instalment arrangement usually means fewer penalties than paying piecemeal without one. Late payment penalties and, eventually, use-of-money interest apply to unpaid tax; use-of-money interest in plain words covers how.
Some owners would rather clear the tax and spread the cost over a planned term with a lender. If that sounds sensible for your situation, you can find out what’s possible without a credit check.
Plan year two before it starts
The second-year bill is predictable, which means it’s plannable. Our GST & provisional tax set-aside planner helps you see the instalments and dates together, and our feature on money in your first year in business covers the other milestones, from GST registration to the first ACC invoice.
When growth and tax arrive together
Year two is also when many businesses hire, lease bigger premises or invest in equipment. If tax catch-up and growth are competing for the same cash, a facility arranged early can let you keep both on track. We look at unsecured options for trading businesses (newer businesses may need property security) and loans secured on property. Enquiring won’t touch your credit file, your details aren’t distributed to other lenders, and a real person reads your answers. Accurate figures mean a more useful first call. Start your enquiry.
Frequently asked questions
Do I pay provisional tax in my first year of business?
Not if you use the standard, estimation or ratio options. Inland Revenue confirms there's no provisional tax during the first year under those options, because there's no previous year to base it on.
When is my first year's income tax due?
Usually by 7 February of the following year, or later if you have a tax agent with an extension of time. That can coincide with provisional tax for your second year.
What is the early payment discount?
It's a discount Inland Revenue may give when you make voluntary tax payments during the tax year before you're required to pay provisional tax. Check the current conditions on ird.govt.nz or with your accountant.
Does AIM avoid the second-year squeeze?
AIM calculates tax on actual profit as you go, so it can spread tax across the year instead of leaving it all to the end. It needs AIM-capable accounting software and is available to businesses with turnover under $5 million.