What Is Residual Income Tax (RIT)

Residual income tax, provisional tax, or terminal tax?

Three labels, one income tax bill. Inland Revenue’s provisional tax page is the live trigger. The options hub sits on Provisional tax NZ.

How is residual income tax worked out?

Inland Revenue’s Provisional tax IR289 guide: residual income tax is the amount of tax to pay on your taxable income, less any PAYE deducted and any other tax credits you may be entitled to (except Working for Families). The Income Tax Act 2007 section YA 1 definition matches that idea: it is the positive amount left after subtracting listed credits from the income tax liability. Provisional tax is not in that list.

The independent earner tax credit has sat in that list since 1 April 2009. How you claim it on wages is on IETC eligibility and the ME tax code. Schedular withholding also reduces residual income tax. If the leftover is still more than $5,000, instalments can still start.

When does residual income tax trigger provisional tax?

Inland Revenue: 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. Exactly $5,000 is not over the line. The instalments belong to the following tax year. Put last year’s figure into the provisional tax calculator if you want the standard 5 percent uplift split into dates.

Inland Revenue lists common leftover tax on self employed income, rental income, contractor income, partnership income, and overseas income. Salary and wage earners can still land here after a wrong tax code, a lump sum with too little tax, employee share scheme income with no tax deducted, or some bright line property sales.

A first year of self employment often has no prior residual income tax over $5,000, so instalments may wait until the next year. You still file and pay the end of year tax. Inland Revenue also describes two current year cases, even with no history: an individual (not a trustee) if 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, and they stopped employment income and started a taxable activity with no tax deducted at source; and a non individual (including a trustee) if they started a taxable activity this year, had none in the last 4 years, and residual income tax is $60,000 or more (from the 2018 year onwards).

What happens after you know residual income tax?

On the standard option, Inland Revenue uses last year’s residual income tax plus 5 percent, or residual income tax from 2 years ago plus 10 percent if the latest return is not filed in time and you have an extension of time. IR289: if residual income tax was $10,130, next year’s provisional tax is $10,636. Estimation uses the residual income tax you forecast for this year. The ratio option applies a percentage to GST taxable supplies. AIM uses approved software. GST timing with those options is on GST and provisional tax.

When the return is filed, Inland Revenue compares residual income tax with what you paid. Interest (use of money interest) is a charge for the use of money, not a penalty. On the standard option, residual income tax under $60,000 usually starts interest from the day after the end of year tax due date. Residual income tax of $60,000 or more starts from the day after the final instalment date if the other instalments were paid in full and on time. Estimation can charge interest from each instalment date even if you paid the estimated amounts on time. Inland Revenue will not charge or pay interest if you under or overpay by $100 or less.

Inland Revenue: a tax bill for 1 April 2024 to 31 March 2025 was due 7 February 2026, or 7 April with a tax agent extension of time. You’ll have to start paying provisional tax if your tax to pay is more than $5,000.

What people get stuck on

PersonalFinanceNZ asks whether an extra payment before year end can keep residual income tax under $5,000 so instalments never start. Inland Revenue’s definition does not subtract that extra. Residual income tax is the leftover after listed credits. The extra sits later, as a prepayment against the wash up.

Forum posts still quote a $2,500 trigger, or treat $5,000 exactly as “over”. Inland Revenue’s live page is more than $5,000. Mackinlays pages that still lead with $2,500, then mention a Covid lift, are behind the current guide.

Geekzone contractor threads mix PAYE, withholding, and residual income tax into one “tax already paid” pile. Withholding credits do come off residual income tax. Provisional tax does not. If residual income tax still clears $5,000, you are on instalments even with a fat IR330C rate.

Quora and Medium pieces that import Australian PAYG or US estimated tax are coverage only. This is residual income tax under the Income Tax Act 2007.

Frequently asked questions