How much should I put aside for tax?
Most business owners ask us how much they should put aside to meet their tax obligations. It's easy when you follow our simple guidelines!
The first thing we need to do is identify what type of tax we’re talking about. The two taxes you need to put money aside for are Income Tax, and Goods and Services Tax.
Income tax comes in two forms: Provisional Tax and Terminal Tax. In your first year of business you are not required to pay Provisional Tax. You only pay income tax at the end of the next financial year, which is a Terminal Tax payment.
In your second and subsequent years in business, you are required to pay Provisional Tax. This is an estimate of what the income tax might be for that year, and is paid before knowing what the income tax is, i.e. it’s provisional until the actual income tax is calculated. If the provisional tax payment wasn’t enough, the income tax gets topped up with a Terminal Tax payment. If the Provisional Tax was overpaid, you get a refund.
Inland Revenue has rules setting out how much Provisional Tax should be paid and when. Many business owners find Provisional Tax confusing, and that’s where we can help. It’s part of our job to advise you when payments are due. The main thing you need to know is that you must put money aside to pay any income tax, regardless of whether it’s Terminal or Provisional Tax. Ideally you should put the money into a separate savings account as you earn it.
By following our basic guidelines, you shouldn’t have any problem making income tax payments when they are due. We endeavour to advise you about these payments several weeks before the due date.
If you haven’t put enough money aside for income tax, there are options are available. This includes Payment Plans with Inland Revenue and Tax Pooling, and will generally involve penalties and interest for late payment. Penalties are not tax deductible, but interest is.
If you’re concerned that you haven’t put sufficient funds aside, please don’t hesitate to let us know. We’ll help you find the most cost-effective and affordable solution for you.
Good and services tax
If you are GST registered, you will be adding 15% to every invoice. This 15% belongs to the government. You may also be claiming GST on your expenses, which can be deducted from the GST you owe to the government. Some expenses, such as wages and interest, do not have any GST.
To be safe, you could put aside all the GST you added to your invoices. If you have very high expenses, you could reduce this by what ever margin you feel is right for you. If you are operating at a loss, your GST expenses may be higher than your GST income. In this case you may be due a GST refund and may not need to put aside money for GST.
In general, we recommend putting aside 10-15% of the GST you’ve added to your invoices. This works out to be 8.5-13% of the GST included amount of your invoices. Putting it into a separate savings account is a good idea, especially if you are on six monthly GST returns. If you are GST registered, you should put funds aside to cover both Income Tax and GST.
We recommend a conservative approach and believe it’s better to put more aside than you may need. Look at it as a form of saving; if you don’t end up needing all the money for your tax obligations, you can use the funds for some other purpose.