Terminal tax and use-of-money interest

Terminal tax is the reconciliation at the end of every tax year. It's what your return says you owed, minus what provisional tax already paid, settled on one date. Use-of-money interest is what IRD charges when the timing goes wrong. Most contractors only ever meet the first. This guide covers both, so the second stops being something to worry about and becomes something you can occasionally decide about on purpose.

How terminal tax squares up

When you file your return, the difference between the year's actual tax and your provisional payments becomes either terminal tax that you owe or a refund that IRD owes you. It is due 7 February after the tax year ends, or 7 April if a tax agent with an extension of time handles your return. Those two extra months are one of the quieter benefits of having an agent. Terminal tax isn't a penalty or a surprise category. It is the system working as intended: provisional tax was always an estimate, and this is where it is trued up.

How use-of-money interest works

Inland Revenue charges interest on underpaid tax and pays it on overpaid tax, calculated daily and not compounding. The two rates are different on purpose. From 16 January 2026, underpayments are charged 8.97% while overpayments earn 2.25%. The gap means neither direction of "banking with IRD" pays off.

When interest actually applies to you

For most contractors it rarely applies, because of the safe harbour. If your residual income tax is under $60,000 and you paid your standard-option instalments in full and on time, no interest applies to any shortfall. The gap waits for terminal tax day, interest-free. The situations that do bring interest into play are these:

• Missing or late instalments. Interest runs from the instalment date on the amount that should have been paid. Late payment penalties apply on top of that, and they are separate from interest and more costly.
• Estimating and getting it wrong. Estimation takes you outside the safe harbour. If you underestimate, the shortfall accrues interest from the instalment dates.
• Residual income tax over $60,000. Above this line, the timing rules tighten, and shortfalls between your instalments and your true liability can accrue interest. This is the territory where your choice of method (the methods guide) and an accountant both earn their keep.

What underpaying actually costs

Occasionally cash flow forces a choice between paying an instalment and paying for something the business needs. Think about it as a cost of credit. Within the safe harbour, a shortfall costs nothing until terminal tax. Outside it, an underpayment is borrowing at the underpayment rate, 8.97% at the time of writing, charged daily and not compounded. Compare that with what other money costs you. Sometimes IRD is the cheapest credit available, and more often an overdraft or facility is cheaper. Ignoring the position is the one thing that doesn't work, because the interest runs whether you're watching it or not.

How Coffer helps

Terminal tax and interest come down to whether you set enough aside during the year. Coffer tracks that as you go. It ringfences income tax from every paid invoice at your projected effective rate, counts down your instalment due dates, and logs each provisional payment against the set-aside. A shortfall shows up on your dashboard months before it shows up as interest.