Quick answer
Use-of-money interest (UOMI) is Inland Revenue's charge for having the use of tax money that should have been paid earlier, and it also pays interest when you've overpaid. It isn't a penalty. It applies to late or underpaid provisional and end-of-year tax. Smaller taxpayers on the standard option, AIM users who pay on time and correct ratio users are largely protected from it.
Key points
- UOMI is a charge for the use of money, not a penalty, and Inland Revenue can also pay it on overpayments.
- Safe harbour: with residual income tax under $60,000 on the standard option, interest generally only applies after the year-end due date.
- AIM paid in full and on time, and ratio applied correctly, avoid UOMI on shortfalls.
- Tax pooling lets you buy tax paid on an earlier date to reduce interest exposure.
Few phrases make owners as uneasy as “use-of-money interest”. It sounds like a fine. It isn’t, quite, and once you understand when it applies, most of the anxiety goes. Better still, the provisional tax option you choose can protect you from much of it.
What is use-of-money interest?
Use-of-money interest, usually shortened to UOMI, is how Inland Revenue squares the ledger when tax is paid later or earlier than it should have been. Inland Revenue’s own wording is that interest “is not a penalty — interest is a charge for the use of money.”
It works both ways:
- If you underpay or pay late, Inland Revenue charges interest, generally from the day after the instalment was due.
- If you overpay, Inland Revenue generally pays you interest, except under AIM.
- Small differences are ignored: if the underpayment or overpayment totals $100 or less, no interest is charged or paid.
We don’t quote the interest figure here. It’s set by Inland Revenue, changes over time and is published on its website. What matters for planning is when it starts running.
When does UOMI apply on provisional tax?
That depends on your option and the size of your residual income tax (RIT).
| Situation | When interest starts on a shortfall |
|---|---|
| Standard option, RIT under $60,000 (safe harbour) | Only if tax is still unpaid after the year-end due date |
| Standard option, RIT $60,000 or more, all but the final instalment paid in full and on time | From the final instalment date |
| Standard option, RIT $60,000 or more, an earlier instalment late or short | From that instalment’s due date, and later ones |
| Estimation option | From each instalment if your estimate proves too low |
| Ratio option, applied correctly | No UOMI on a shortfall against the year-end liability |
| AIM, paid in full and on time | No UOMI charged |
The safe harbour is the quiet hero for small and medium businesses. Since the 2023 tax year, standard-option taxpayers with RIT under $60,000 don’t need to pay every instalment in full and on time to stay clear of interest; it’s only charged if tax remains unpaid after the year-end due date. You still want to pay the instalments, because the money has to be found eventually, but a slightly late instalment doesn’t trigger interest on its own. Late payment penalties are a separate matter, so dates still count.
Why does the estimation option carry more risk?
Under estimation, your instalments are based on your own forecast. If the business does better than you estimated, Inland Revenue charges interest on the difference from each instalment date, and a penalty can apply if the estimate was too low. That’s why estimation suits a year when profit is clearly falling, and why it needs re-estimating whenever the outlook changes. More on the choice in the four provisional tax options.
How does tax pooling reduce interest?
Tax pooling is run by commercial intermediaries registered with Inland Revenue. You pay provisional tax into the pool, the intermediary deposits it with Inland Revenue, and when funds are transferred to your account, Inland Revenue treats them as paid on the date they originally went into the pool.
In practice that lets businesses that missed an instalment, or underestimated, buy tax effectively dated earlier, which can reduce UOMI and late payment penalties. Intermediaries charge a fee for this, so compare it with the interest you would otherwise face. Your accountant will usually know which intermediaries they work with.
What about late payment penalties?
Penalties sit alongside interest. Inland Revenue’s late payment penalty regime starts the day after the due date, with a further penalty after seven days. For GST and income tax, including provisional tax, the ongoing monthly penalty no longer applies, but the first two can still add up. First-time late payers may be offered a grace period. Contacting Inland Revenue early, and agreeing an instalment arrangement if you can’t pay in full, is the best way to limit both.
Illustrative example
A Palmerston North engineering firm has RIT of $48,000 last year and uses the standard option. Its instalments are $16,800 each. A large customer pays late, and the firm pays the 15 January instalment two weeks after the date. Because RIT is under $60,000, the safe harbour means no UOMI arises from the late instalment alone, provided the year’s tax is paid by the year-end due date. A late payment penalty can still apply to the late instalment, so the firm contacts Inland Revenue and pays as soon as the customer’s money lands.
If the same firm’s RIT were $90,000, the late January instalment could bring interest from 15 January on the shortfall.
How do you keep interest out of the picture?
- Choose the right option for your profit pattern, and check the safe harbour threshold.
- Set aside every week so instalments are paid on time. The set-aside planner works out the amount.
- Re-estimate promptly if you’re on estimation and trading improves.
- Watch the year-end due date, usually 7 February, because that’s when safe harbour protection ends. See terminal tax.
If tax and trading are pulling apart
Interest and penalties are the cost of tax money arriving late. If the reason is a cash gap rather than disorganisation, closing the gap can be cheaper than carrying the cost. We look at unsecured options for trading businesses and property-secured lending, and you can check eligibility without a credit check.
Next step
If the business keeps finding itself short at tax time, it’s worth a proper conversation about working capital. Asking us costs your credit file nothing, your enquiry stays with one team instead of circulating among lenders, and a real person reads what you write. Accurate answers on the form let us be specific from the first call. Start the enquiry.
Frequently asked questions
Is use-of-money interest the same as a late payment penalty?
No. Inland Revenue describes interest as a charge for the use of money, not a penalty. Late payment penalties are separate charges that can apply when tax isn't paid by the due date.
Does IRD pay interest if I overpay provisional tax?
In most cases, yes. The exception Inland Revenue lists is AIM: if you use AIM and overpay, you won't be paid interest.
What is the provisional tax safe harbour?
It applies to standard-option taxpayers whose residual income tax is under $60,000. Since the 2023 tax year, these taxpayers are only charged use-of-money interest if tax is still unpaid after the year-end due date, rather than from each instalment.
What if my residual income tax is $60,000 or more?
On the standard option, if you've paid all but your final instalment in full and on time, interest applies from the last instalment date. If an earlier instalment is late or short, interest can be charged from that instalment's due date.
Is there a minimum amount?
Inland Revenue won't charge or pay interest if the underpayment or overpayment totals $100 or less.