What is provisional tax and why do I have to pay it during the year?

Provisional tax is a system under the Income Tax Act 2007 that requires taxpayers whose residual income tax, meaning the tax remaining after deducting tax already withheld such as PAYE, exceeds a set threshold, currently 5,000 dollars, to pay tax in instalments throughout the year rather than as one lump sum after filing the return. This usually applies to self-employed people, some shareholder-employees and those with significant investment income. There are different methods to calculate the instalments, including the standard method based on the previous year's income with an uplift, and the estimation method where you estimate your current year's income, and more recently the accounting income method for some businesses using compatible software. Getting the estimate wrong can lead to use of money interest, so many taxpayers use a tax pooling arrangement or seek help from an accountant to manage provisional tax payments and reduce interest exposure.