Terminal tax and use-of-money interest

Terminal tax is the reconciliation at the end of every tax year: what your return says you owed, minus what provisional tax already paid, settled on one date. Use-of-money interest is the meter that runs when the timing goes wrong. Most contractors only ever meet the first; understanding the second is what lets you stop fearing it, and occasionally make a deliberate decision about it. This guide covers both.

Terminal tax: the wash-up

File your return, and the difference between the year's actual tax and your provisional payments becomes terminal tax (you owe) or a refund (they do). It's due 7 February after the tax year ends, or 7 April if a tax agent with an extension of time handles your return; the two extra months are one of the quieter benefits of having an agent. Terminal tax isn't a penalty or a surprise category, it's the system working: provisional tax was always an estimate, and this is the truing-up.

Use-of-money interest: the meter

Inland Revenue charges interest on underpaid tax and pays it on overpaid tax, calculated daily, not compounding. The rates are deliberately asymmetric: from 16 January 2026, underpayments are charged 8.97% while overpayments earn 2.25%. The gap is the point; the rates are set so that neither direction of "banking with IRD" is attractive.

When interest actually applies to you

For most contractors, rarely, 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 simply waits for terminal tax day, interest-free. The situations that switch the meter on:

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

The honest arithmetic of underpaying

Occasionally cash flow forces a choice between paying an instalment and paying for something the business needs. The honest frame: within the safe harbour, a shortfall costs nothing until terminal tax; outside it, an underpayment is effectively borrowing at the underpayment rate (8.97% at the time of writing), daily, uncompounded. Compare that with what other money costs you. Sometimes IRD is the cheapest credit available; more often, an overdraft or facility beats it. What never wins is ignoring the position: the meter doesn't pause for inattention.

How Coffer helps

The whole terminal tax + interest topic is downstream of one question: was enough set aside during the year? Coffer answers it continuously: income tax ringfenced from every paid invoice at your projected effective rate, instalment due dates counting down, and each provisional payment logged against the set-aside, so a shortfall shows up on the dashboard months before it shows up as interest.