Understanding Provisional and Terminal Tax

Tax Basics Crash Course – Episode 3

If you’re just starting out in business, it’s not unusual to find yourself frustrated and confused by the jargon and rules around tax. But being prepared for those obligations is one of the best ways to ensure you don’t find your new business in financial strife due to un-planned outgoings.

One of the common areas people get caught out is around Provisional Tax and Terminal Tax.

So, what are they, and what’s the difference?

Provisional Tax

As you work and grow your business, you need to make sure you provide for your tax obligations at the end of the financial year. To make sure we don’t renege on our tax obligations, the government asks us to pay a “provision” up front as we earn it. This upfront amount is called Provisional Tax.

Terminal Tax

When the financial year has ended (normally 31 March each year) and your year-end accounts have been finalised, it’s possible that there will be a difference between what you paid during the year (that’s Provisional Tax) and the amount it should be. This final amount is called Terminal Tax.

If your previous year has gone extremely well and profits were high, you could find your following year’s provisional tax to be a shock if you haven’t stayed across your earnings. A lot of successful young businesses are caught out by this in their second year operating, when they must pay both the prior year’s tax, and provisional tax for the coming year too.

Want help staying prepared for your tax obligations and keeping on top of cashflow? Or got another burning question about tax or accounting? Get in touch, we would love to help make it easy.

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