Income tax and ringfencing

Income tax builds up slowly for a NZ contractor. Every dollar you earn from a paid invoice has tax attached to it, but IRD doesn't take it as you go. It collects in instalments during the year (provisional tax) and a square-up at the end (terminal tax). Coffer keeps that running total in front of you from the moment a client pays, so you can always see how much of the cash in your account is actually yours and how much is set aside for IRD.

How ringfencing works

When you mark an invoice paid, Coffer takes the ex-GST amount, multiplies it by an income tax rate, and adds that to your income tax ringfence, which is a running total on your dashboard. When you log a provisional or terminal tax payment to IRD, the ringfence drops by what you paid.

The rate for each invoice is locked the moment you mark it paid, using your projected income at that point. If your income changes later, Coffer leaves that invoice's set-aside alone and adjusts the rate on the invoices that come after. So your past invoices stay put as the year goes on, and any catch-up you owe gets picked up on new income instead of quietly re-pricing invoices you've already set money aside against.

Coffer works out that rate by walking the NZ income tax brackets on your projected income. You give Coffer your expected income for the year, in the welcome wizard or in Settings, and it blends that with what you've actually billed so far to project your annual income, walks the brackets, and lands on an effective rate. Every paid invoice is ringfenced at that rate, and as the year goes on the projection settles onto what you're really earning.

Until you've entered an expected income, Coffer falls back to a flat 33.7% rate so the dashboard still shows something sensible. Once you add your expected income, the bracket walk takes over.

The NZ income tax brackets Coffer uses

Coffer walks the post-July-2024 IRD thresholds:

• $0 to $15,600 at 10.5%
• $15,601 to $53,500 at 17.5%
• $53,501 to $78,100 at 30%
• $78,101 to $180,000 at 33%
• $180,001 and above at 39%

The brackets are progressive, so each slice of your income is taxed at its own bracket rate, not the whole lot at one rate. Someone projected to earn $120,000 for the year has an effective rate around 24.6%, not 33%.

Paying IRD: provisional and terminal tax

Once your tax bill for a year gets big enough, IRD starts collecting the next year's income tax in instalments (provisional tax), plus a final square-up after you file your IR3 (terminal tax).

Standard-option provisional tax instalments fall on 28 August, 15 January, and 7 May for a 31 March balance date (Coffer's default). If you're on six-monthly GST filing, you only have two instalments: 28 October and 7 May. If you're in your first year of self-employment, you don't pay provisional tax for the first year at all; toggle the “pays provisional tax” setting off until your second year.

When you make a provisional or terminal tax payment to IRD, log it in Tax events as a provisional tax or terminal tax payment, with the amount paid and a period label (e.g. “Provisional 2 2026”). The dashboard's income tax ringfence drops by the amount you logged.

When the ringfence goes negative

If you pay IRD more than Coffer has accrued in the ringfence (a slight over-payment, or a terminal tax bill that included income Coffer didn't see), the ringfence goes negative. That's deliberate. It means IRD owes you the difference, and your “Yours to spend” figure on the dashboard accounts for it.

Same applies in reverse: if you under-paid an instalment, the ringfence stays positive and tells you exactly how short you are.

A note on ACC

ACC levies are a separate charge on self-employed earnings, based on your line of work and your income for the year. ACC invoices are sent directly to you and paid separately from income tax.

Coffer ringfences ACC on its own, as a third set-aside alongside GST and income tax. Tell Coffer your ACC classification in Settings and it estimates the levy and sets money aside as you get paid. See ACC levies for the full picture.