Tax rules and rates change. This page explains how the system works so you know what to ask about; it is not tax advice for your situation. Confirm current rates and thresholds at ird.govt.nz, and talk to a chartered accountant before making decisions.
How sole trader tax works
There is no business tax and no personal tax as separate things. Because you and the business are the same legal person, your business profit is simply part of your personal income.
The calculation is straightforward:
business income − allowable expenses = net profit
net profit + any other income = total taxable income
total taxable income → personal tax rates → tax to pay
Nobody deducts this for you as it comes in. Unlike a salary where PAYE handles it invisibly, every dollar a client pays you arrives with the tax still in it. Setting that money aside is the single most important habit in this guide.
Tax rates
New Zealand uses progressive brackets, so a higher rate only applies to the portion of income above each threshold, not to everything you earn. The lowest rate is 10.5% and the top rate is 39%. Because rates and thresholds change, check the current bands on the IRD website rather than relying on any figure you read on a blog, including this one.
Many accountants tell new sole traders to put aside somewhere around 30% of every payment received, in a separate savings account, and not touch it. If you end up with too much set aside, that is a pleasant problem. Adjust the percentage once you know your actual bracket.
Your IR3 return
Sole traders file an IR3 individual income tax return covering the year to 31 March. Business income and expenses go on it alongside anything else you earned: salary from a day job, interest, rental income.
If you file it yourself, the deadline is 7 July. If you are with a tax agent, you generally get an extension of time. Terminal tax, the final square-up, is usually due 7 February the following year, or 7 April if you have an agent.
Provisional tax: the year-two surprise
This is what catches people, so it is worth reading carefully.
In your first year of self-employment you generally pay no tax during the year. You trade, you file your IR3, and you pay the lot in one go. Fine.
The problem is what happens next. If your residual income tax (broadly, the tax left owing after anything already withheld) comes to more than $5,000, you automatically become a provisional taxpayer for the following year. That means paying next year's tax in instalments at the same time as you are settling last year's bill.
In a bad case you find yourself paying terminal tax for year one and the first provisional instalment for year two within a few months of each other. The tax was always going to be owed, but if the money was spent, it lands as a shock. This is the reason for the separate savings account.
Standard provisional instalment dates for a 31 March balance date are 28 August, 15 January and 7 May. There are several methods for working out how much to pay: the standard uplift method based on last year, an estimate of this year, or AIM which calculates from your accounting software. An accountant will pick the one that suits your income pattern.
ACC levies
Employees have the ACC earner's levy taken out through PAYE without noticing. Self-employed people are invoiced directly, usually around September, once IRD passes your declared earnings to ACC.
Your levy depends on your income and your classification unit, the code describing what you actually do. A desk-based consultant pays a very different rate from a roofer, for good reason. Make sure your classification unit is correct: an inaccurate one can cost you significantly every year. More on ACC cover and options.
Key dates at a glance
| Date | What |
|---|---|
| 31 March | End of the tax year |
| 7 May | Third provisional instalment |
| 7 July | IR3 due if you file it yourself |
| 28 August | First provisional instalment |
| Around September | ACC levy invoice arrives |
| 15 January | Second provisional instalment |
| 7 February | Terminal tax (7 April with a tax agent) |
GST returns run on their own cycle, usually two-monthly. See the GST guide.
Four habits that keep you out of trouble
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Separate the money on the way in
One bank account for the business, and a savings account you move a fixed percentage into every time you are paid. Do it as the money arrives, not at the end of the month.
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Keep every receipt as you go
Photograph them the day you get them. IRD generally requires business records to be kept for seven years. Reconstructing them later is slow and you will miss deductions you were entitled to. What counts as a deduction.
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Invoice promptly and chase politely
Cash flow, not profit, is what sinks small businesses. Send the invoice the day the job finishes. Free invoice generator.
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Get an accountant before you need one
An hour or two a year is cheap compared with an amended return, a penalty, or years of unclaimed deductions. Fees are themselves deductible.