Struggling to understand Provisional Tax
We get it, provisional tax is confusing. It’s one of the most common frustrations for our clients – everyone knows they need to pay it, but understanding what it actually is or how it works is where people get stuck. Let’s simplify it:
What It Is: Provisional tax is like a ‘pay-as-you-earn’ system for your business income. Instead of one big bill at the end of the year, you pay your income tax in instalments. This helps you manage your cash flow better.
Who Pays It: If you’re self-employed, own rental properties, or earn income without PAYE deducted, and your last year’s tax bill was over $5,000, provisional tax is for you.
Calculating It: There are a few ways to calculate it, but the most common is the ‘standard method’ where you take your previous year’s tax, add 5%, and split it into instalments. If you’re aligned with GST payments, these might be in two or three instalments a year.
Why It’s Important: Paying provisional tax helps avoid a large tax bill at year’s end. It’s about staying on top of your finances and smoothing out tax payments over the year.
Remember, a good accountant isn’t just about telling you what and when to pay. They’re there to guide you through the ‘why’, helping you understand your tax obligations while keeping your business’s financial health in check. If you’re feeling overwhelmed, reach out – we’re here to make tax simpler for you.
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