Your first provisional tax bill

Provisional tax has a specific way of catching new contractors out. It leaves you alone in year one, then arrives in year two alongside year one's entire tax bill. It isn't complicated once you can see the timeline. It's a shock when the first time you see it is in the letter from Inland Revenue. This guide walks through exactly what happens, when, and how much money to have ready.

Year one: no one asks for tax

In your first year of contracting, no one asks you for income tax. There's no PAYE, no instalments, and no reminders. You invoice, you get paid, and the tax on all of it builds up as a debt that hasn't been measured yet. It gets measured when you file your first tax return (the IR3, due 7 July after the 31 March year end), and the bill for the whole year lands as terminal tax the following February (7 February, or 7 April with a tax agent).

The trigger: $5,000 of residual income tax

That first return also sets up what comes next. If it shows more than $5,000 of residual income tax (tax not covered by deductions at source, which for a contractor is most of it), you become a provisional taxpayer, which means that from the next year you pay tax as you go, in instalments. A contractor crosses $5,000 of tax at roughly $35,000 of profit, so most people who contract full-time become provisional taxpayers after their first return.

Year two: the double hit

This is the timeline that catches people out. Suppose you start contracting in April 2026 (the start of the 2026-27 tax year) and do well:

• July 2027: you file your first IR3. It shows, say, $25,000 of tax for your first year. That bill is now real, due the following February.
• August 2027 to May 2028: because you crossed the $5,000 line, you're also paying 2027-28 provisional tax as you go: roughly $26,250 (last year's tax plus 5%) across three instalments.
• February 2028: terminal tax for year one, the $25,000, falls due in the middle of those instalments.

Add it up: in the twelve months from August 2027, this contractor pays around $51,000 of tax, two years' worth, out of cash flow, while earning normally. That's the double hit. It isn't a penalty and it isn't double taxation. It is year one's deferred bill and year two's pay-as-you-go arriving together, which is how the system is designed to work.

What the instalments look like

By default you'll be on the standard option: last year's tax plus 5%, split into three equal instalments (28 August, 15 January, 7 May for a standard year end, or two instalments instead if you file GST six-monthly). If you pay them in full and on time, and your year's tax stays under $60,000, no interest applies even if you end up owing more, and the shortfall just waits for terminal tax. The alternatives, which are estimating downward in a lean year or the methods that track income, are covered in the methods guide.

The first-year checklist

• Set aside income tax at your effective rate from invoice one (the bracket guide has the table).
• File the first IR3 promptly after 31 March. The sooner it's filed, the sooner the numbers are certain.
• When the provisional letter arrives, put the three instalment dates somewhere you'll see them (the calendar lists this year's).
• Treat terminal tax as the known event it is. The money for it was earned in year one and should have been set aside in year one.

How Coffer helps

Coffer builds the year-one habit for you. From your first paid invoice it ringfences income tax at your projected effective rate, so the money for your first IR3 bill builds up across the year instead of having to be found later. When provisional instalments start, the due dates show up with countdowns, each payment you log draws down the set-aside, and the dashboard tells you what you most want to know in year two: is the next bill already covered?