If you’re new to business, you may be eligible for a discount for paying your income tax early. This applies to sole traders, contractors and partnerships.
Start by checking if the early payment discount makes sense for your situation and your cash flow. Then set yourself up with good systems and get your tax ducks in a row.
In your first year of business, you don’t have to pay income tax until months after the tax year ends — usually 7 February of the following year, or 7 April if you have a tax agent.
But you may be eligible for a 6.7% discount if you:
The discount can quickly add up:
Paying tax in your first year of business(external link) — Inland Revenue
Just because you can pay income tax early doesn’t mean you should. Lisa Martin, former Vice President of the Institute of Certified New Zealand Bookkeepers (ICNZB), recommends doing a cost/benefits analysis to work out which will be better for your business:
“For example, if you’re the main breadwinner in your family, and you have a revolving credit mortgage, you might be better off keeping the money in your revolving credit account. This saves interest on your mortgage.”
Likewise, if you have a number of business expenses looming, it might make more sense to keep the cash, rather than paying tax early.
If you decide to go ahead and pay your tax early, you need be able to correctly calculate what you owe and what you can claim. Setting up the right systems early on will help when it comes to sorting out your taxes.
“A lot of people just fall into self-employment and don’t take the time to set themselves up properly,” says Martin.
Even something as simple as setting up a separate business banking account makes a difference.
“Don’t mix up your business income and expenses with your personal accounts, or joint accounts. It becomes difficult months down the track when you try to sort out what’s business spending and what’s personal.”
When you’re starting out, you don’t know what you don’t know. So it may be tricky to work out how to set yourself up properly. Consider getting expert help from an accountant or bookkeeper, to save time and stress and to get set up properly.
Among other things, they can give advice on:
They’ll also be able to set you up with an accounting software system. Online accounting makes it easier to track what you earn and what you spend, plus tax to pay and expenses to claim at tax time.
Once you get a better idea of your income and expenses you can track the money coming in and out of your business, what expenses you can claim and what expenses are coming up, you’ll be better placed to make a decision about whether to pay your tax early.
Use the guide above for tax-reducing tips on how to: