First Year Self Employed No Provisional Myth
The first year self employed no provisional myth says year one is tax free because Inland Revenue does not collect instalments. That reading skips the income tax bill that still lands after year end.
Inland Revenue: if you use the standard, estimation or ratio options, you will not need to pay provisional tax during your first year of business. Your first year in business is not tax free. Any income tax from that year is usually due by 7 February the following year. If you have an agent it will be due by 7 April.
The myth
No provisional tax in year one, so there is no tax at all. Spend the profit. Worry about Inland Revenue later.
Inland Revenue
No instalments on standard, estimation, or ratio during that first year. You still file. You still pay residual income tax. Year two can stack that bill with new instalments if residual income tax from the last return was more than $5,000.
Year one is a delay, not a holiday
Inland Revenue’s paying tax in your first year in business page: this may mean you must pay income tax for your first year in business at the same time as paying provisional tax for your second year in business. Who pays sits on the Provisional Tax hub.
Do I pay provisional tax in my first year of self employment?
Usually no, on the standard, estimation, or ratio options. Inland Revenue’s first year page groups those three together: you will not need to pay provisional tax during your first year of business. The provisional tax overview still uses last year’s leftover tax: you will have to pay provisional tax if you had to pay more than $5,000 tax at the end of the year from your last return. Residual income tax is that leftover figure: what is residual income tax.
Inland Revenue: if you use the accounting income method (AIM), you will only pay provisional tax when you make a profit, even during your first year. AIM is a year one exception, not a tax holiday. Option split: AIM vs standard vs ratio.
Provisional tax IR289: you will not have to pay provisional tax during your first year in business unless your previous year’s residual income tax was $5,000. A side hustle on top of leftover tax already over $5,000 is not a blank first year.
Inland Revenue’s interest page describes a new provisional tax liability when current year residual income tax is $60,000 or more and the new taxpayer tests are met. Interest can run from instalment dates even where last year’s residual income tax was $5,000 or less.
No instalments during year one on standard, estimation, or ratio. File the IR3. Pay residual income tax as end of year tax. If that bill is more than $5,000, instalments usually start the following year.
When is first year income tax actually due?
Inland Revenue: any income tax from your first year in business is usually due by 7 February the following year. If you have an agent it will be due by 7 April. That is the payment date, not the filing date. Inland Revenue’s income tax returns are due 7 July page: complete an Individual income tax return IR3 at the end of the tax year if you received more than $200 (before tax) in income that Inland Revenue has not been told about, including self employment. If you are required to file and do not file by 7 July, penalties or interest may apply, unless you have an extension of time.
The Individual income tax return guide IR3G for 1 April 2025 to 31 March 2026: complete and send the IR3 by 7 July 2026, unless you have an extension of time or a non standard balance date. If you have tax to pay, you must pay it by 7 February 2027. If you have an agent and a standard or late balance date you may have until 7 April 2027 to pay.
r/PersonalFinanceNZ threads mix 7 July, 7 February, and 7 May into one “tax day”. 7 May is a provisional tax instalment date on Inland Revenue’s payment dates for provisional tax page for a 31 March year on standard or estimation. It is not the first year end of year tax date.
Student loan
Inland Revenue: if you are self employed and have a student loan, you may have to make repayments in your first year of business. Contact Inland Revenue. Send a message in myIR.
What happens in year two when bills stack?
The cashflow shock is year two, not year one. Inland Revenue: this may mean you must pay income tax for your first year in business at the same time as paying provisional tax for your second year in business. IR289: your end of year tax could be a significant amount if you do not have any voluntary payments to deduct. Put money aside from invoices in year one. The provisional tax calculator splits last year’s residual income tax plus 5% across the standard dates once you are over $5,000. A first year profit estimate sits on the self employed tax calculator.
Use case: Inland Revenue Isobel (IR289)
Situation: Isobel started her own business in October 2018. In June 2019 she sent in her first income tax return, for the year ended 31 March 2019. Residual income tax (also her end of year tax) was $75,000. She used the standard option to work out 2020 provisional tax of $78,750 ($75,000 plus 5%).
Stack: 28 August 2019 provisional $26,250. 15 January 2020 provisional $26,250. 7 February 2020 end of year tax $75,000. 7 May 2020 provisional $26,250. Because she made no voluntary payments for 2019 income tax, she must pay her $75,000 end of year tax as well as her $78,750 2020 provisional tax during her second year in business.
Action: treat year one profit as already owing. Voluntary payments in year one cut that February lump. They do not rewrite residual income tax.
| Clock | What Inland Revenue is collecting | Typical 31 March timing |
|---|---|---|
| Year one, during the year | Usually no provisional tax on standard, estimation, or ratio. AIM pays when you profit. | No standard instalments unless you already had residual income tax over $5,000, you chose AIM, or the $60,000 new liability tests apply. |
| File the first return | IR3 for self employed income Inland Revenue has not been told about (more than $200). | 7 July unless you have an extension of time or a non standard balance date. IR3G 2026 example: 7 July 2026. |
| Pay year one income tax | Residual income tax as end of year tax. | Usually 7 February the following year, or 7 April with an agent. IR3G 2026: 7 February 2027, or 7 April 2027 with an agent. |
| Year two instalments | Provisional tax if year one residual income tax was more than $5,000. | Standard or estimation: 28 August, 15 January, 7 May. That 7 February or 7 April bill can sit in the same season. |
Can I get an early payment discount in year one?
Yes, if you meet every test. Inland Revenue lets you make voluntary payments of tax during your first year of business to help spread the cost. If you make voluntary payments you may be able to get an early payment discount. IR289: the discount is treated as a payment towards your residual income tax. Companies, trusts, and other forms of business organisations do not qualify.
Inland Revenue’s criteria:
- ✓You are self employed or a partner in a partnership or an owner of a look through company and get most of your income from the business. IR289: not interest, dividends, royalties, rents, or beneficiary income.
- ✓You make a voluntary income tax payment before the end of the income year, or you use tax pooling funds to make payments for the income year.
- ✓You apply for the discount on or before the date your tax return has to be filed. IR3G: tick Question 37. Example for the year ending 31 March 2026: elect on or before 31 March 2027.
- ✓You do not have an obligation to pay provisional tax in the income year you make voluntary payments or for any of the 4 years before.
From the 2025 income year the early payment discount rate is calculated using the use of money interest credit rate as at 31 March of the previous tax year plus 2%. The early payment discount rate for the 2027 income year is 4.25%. Forum posts still quote 6.7%. That is a past year, not 2027.
| Income year | Early payment discount rate Inland Revenue lists |
|---|---|
| 2027 | 4.25% |
| 2026 | 6.30% |
| 2025 | 6.67% |
| 2024 | 6.67% |
Inland Revenue: Andrew
Andrew makes voluntary payments for the year ended 31 March 2025 of $5,000. His residual income tax for 2025 is $8,000. The early payment discount is calculated on $5,000, being the lesser of the voluntary payments made or 105% of his residual income tax amount ($8,400). The value of the early payment discount is $333.50 being 6.67% of $5,000.
IR289: you can receive another early payment discount in another year if you have not had to pay provisional tax in any of the previous 4 tax years, and you have not had any business income in the 4 year period since you last paid provisional tax or claimed the discount.
What if residual income tax is $60,000 or more in year one?
The $5,000 test is the usual on ramp. The $60,000 line is a different clock. Inland Revenue’s interest on provisional tax page: generally you will not have to pay provisional tax if residual income tax last year was $5,000 or less. There are 2 situations when you will have to pay provisional tax for the current year, even if you have not paid it before.
Individual (not including a trustee of a trust): residual income tax was less than $5,000 for the last 4 years; residual income tax for the current year is $60,000 or more; during the current year you have stopped earning income from employment and instead have started earning income from a taxable activity where tax is not deducted at source. A weekend side hustle while you still have a PAYE job may fail that stopped employment test. Check the live page before you assume you are in or out.
Non individual (including a trustee of a trust): you have started to earn income from a taxable activity in the current year; you did not receive income from a taxable activity in the last 4 years; for the 2018 year onwards, your residual income tax is $60,000 or more.
When Inland Revenue starts calculating interest: if you have to pay provisional tax for the current year, they will start calculating interest from the day after the first provisional instalment date that falls after you began your business (as long as that instalment is more than 30 days after your business start date). IR289: as a new provisional taxpayer, you will pay or receive interest on 1 to 3 provisional tax instalments, based on the date you started your taxable activity.
| Taxable activity starts (IR289, 31 March year) | Number of instalments interest can attach to |
|---|---|
| Before 29 July | 3 |
| On or after 29 July but before 16 December | 2 |
| On 16 December, or any time after that | 1 |
IR289: you will have different dates if you have a balance date other than 31 March, or you file six monthly GST returns. Standard or estimation dates Inland Revenue lists for a 31 March year are 28 August, 15 January, and 7 May.
Does AIM change the first year?
Yes, on timing. Inland Revenue’s AIM page: you will only pay provisional tax when your business makes a profit. The first year page repeats that, even during your first year. You can sign up to use AIM any time during the year. IR289: you can opt into AIM in your first year of business by sending your first Statement of activity with AIM capable software. AIM is available to individuals and companies with a yearly turnover under $5 million. You need to choose AIM each year: accounts switch back to the standard method at the beginning of each tax year until you file the first statement.
Trap: no instalments is not no tax
Baker Tilly Staples Rodway calls the tax free first year a myth. Inland Revenue agrees. Geekzone contractor threads that treat Inland Revenue as silent until you “become a provisional taxpayer” still have an IR3 and an end of year bill. r/PersonalFinanceNZ cannot opt out later once residual income tax is more than $5,000. You change method. You do not switch the tax off.
Frequently asked questions
Is the first year of self employment tax free?
No. Inland Revenue says your first year in business is not tax free. You still file and pay income tax on the profit. Standard, estimation, or ratio usually has no provisional tax during that first year. Income tax from the first year is usually due 7 February the following year, or 7 April if you have an agent.
Do I pay provisional tax in my first year of self employment?
Usually no instalments if you use the standard, estimation, or ratio options. Inland Revenue: you will not need to pay provisional tax during your first year of business on those options. AIM is different: you only pay when you make a profit, even during your first year. If last year’s residual income tax was already more than $5,000, you can already be in the instalment system. If you are a new provisional taxpayer with residual income tax of $60,000 or more, Inland Revenue may charge use of money interest on 1 to 3 instalment dates.
When is first year income tax due if I am self employed?
Inland Revenue: any income tax from your first year in business is usually due by 7 February the following year. If you have an agent it will be due by 7 April. File an IR3 if you received more than $200 of income Inland Revenue has not been told about, including self employment. Inland Revenue’s 7 July page: income tax returns for untaxed income were due 7 July 2026 unless you have an extension of time. The IR3 guide for 1 April 2025 to 31 March 2026: pay by 7 February 2027, or 7 April 2027 if you have an agent and a standard or late balance date.
Can a first year self employed person get an early payment discount?
Yes, if you meet Inland Revenue’s tests. You must be self employed, a partner in a partnership, or an owner of a look through company, and get most of your income from the business. Make a voluntary income tax payment before the end of the income year, or use tax pooling funds for that year. Apply on or before the date your tax return has to be filed. You must not have an obligation to pay provisional tax in that year or for any of the 4 years before. Inland Revenue: the early payment discount rate for the 2027 income year is 4.25%. Companies, trusts, and other forms of business organisations do not qualify. Tick Question 37 on the IR3.