Sole trader tax in New Zealand: A simple guide to your obligations

Published Monday 22 December 2025

Table of contents

• What taxes do sole traders pay in New Zealand?
• Your tax obligations as a sole trader
• Sole trader income tax
• Filing your sole trader tax return
• GST registration for sole traders
• ACC levies for sole traders
• What is provisional tax?
• Sole trader vs company tax differences
• Managing sole trader tax
• Streamline your sole trader tax with Xero
• FAQs on sole trader tax

Key takeaways

• Register for GST when your business turnover reaches or is expected to reach $60,000 in any 12-month period, as this becomes mandatory and allows you to claim GST back on business expenses.
• Prepare for provisional tax payments if you owe $5,000 or more in residual income tax, as you'll need to pay instalments throughout the following financial year rather than one lump sum.
• Maintain separate business bank accounts and accurate records of all income and expenses to simplify your annual IR3 tax return filing and maximise allowable business deductions.
• Choose the appropriate provisional tax calculation method based on your income patterns: use the standard option for stable income, estimate option for expected decreases, ratio option for seasonal businesses, or AIM for irregular income.

What taxes do sole traders pay in New Zealand?

As a sole trader, you're responsible for a few key taxes. Understanding them from the start makes managing your finances much simpler. The main ones to be aware of are:

• Income tax on your business profits
• Goods and Services Tax (GST), which Inland Revenue states you must register for if you earn over $60,000 a year
• ACC levies to cover you for injuries

This guide walks you through each of these so you know what to expect.

Your tax obligations as a sole trader

Staying on top of your tax duties is a key part of running your business. Here's a quick rundown of your main responsibilities:

• Use your individual Inland Revenue Department (IRD) number for all your business tax.
• File an individual tax return (IR3) each year to report your income.
• Pay tax on all your income, including your business profit.
• Register for and charge GST if your turnover is $60,000 or more in a 12-month period.
• Pay Accident Compensation Corporation (ACC) levies to ensure you're covered if you have an accident.

Sole trader income tax

Sole trader income tax uses your individual tax rates, not company rates. You pay tax on your net profit after deducting business expenses.

Here's how it works:

• Tax rate: Same rates as employed individuals
• Tax calculation: Net profit = income minus allowable business expenses
• Filing method: Annual IR3 return using your individual IRD number
• Deductible expenses:Home office costs, vehicle expenses, and other business-related costs

When is your sole trader income tax due?

Income tax deadlines follow a standard timeline each financial year (1 April to 31 March):

Key dates:

• File IR3 return: By 7 July (or 31 March with advisor extension)
• Pay residual income tax: By 7 February following year (or 7 April with extension)

First year: File return, then pay any tax owed by February deadline.

Second year onwards: May require provisional tax payments throughout the year if you owe $5,000 or more.

Filing your sole trader tax return

Each year, you need to report your income to Inland Revenue (IR) by filing an individual tax return, known as an IR3. This return includes your business income and expenses, along with any other personal income you might have.

The deadline to file your IR3 is typically 7 July, unless you use a tax agent who can get you an extension. This is how Inland Revenue (IR) calculates your final tax bill for the year.

GST registration for sole traders

You must register for Goods and Services Tax (GST) if your business earns, or is likely to earn, more than $60,000 in any 12-month period. Inland Revenue specifies this applies if your turnover was at least $60,000 in the last 12 months or you expect it to be in the next 12 months. Once registered, you'll need to charge GST on your sales and can claim it back on your business expenses.

ACC levies for sole traders

As a self-employed person in New Zealand, you're required to pay ACC levies. These levies ensure you're covered for treatment and support if you're injured. Inland Revenue collects these levies on behalf of ACC after you file your tax return. The amount you pay is based on your liable earnings and the type of work you do.

What is provisional tax?

Provisional tax is your income tax paid in advance through instalments during the financial year. It spreads your tax payments across the year instead of one large payment at year-end.

Key benefits of provisional tax:

• Better cash flow: Smaller regular payments instead of large lump sum
• No additional tax: Same total amount, just paid differently
• Reduced year-end surprises: More predictable tax obligations

Provisional tax threshold: You must pay provisional tax if you owe $5,000 or more in residual income tax. This is required if, as Inland Revenue states, you had to pay more than $5,000 tax from your last return.

If you owe less than $5,000:

• No provisional tax required
• Pay in one lump sum by 7 February (or 7 April with extension)

If you owe $5,000 or more:

• Provisional tax required for the following year
• Pay in instalments throughout the financial year

Second year challenge: If your first year RIT is $5,000 or more, you'll pay both:

• Previous year's tax bill (by February deadline)
• Current year's provisional tax (in instalments)

Solutions to manage cash flow:

• Make voluntary payments during your first year
• Set aside money throughout your first year for the second-year payment
• Use accounting software to track and automate tax savings

In your third and later years in business, you usually just pay provisional tax throughout the year if your RIT was $5,000 or more. And if you're paying the right amounts, there should be no end of financial year surprises.

You still need to file an IR3 by 7 July (or by any extension date) each year, even if you are paying provisional tax. If it turns out you paid either too much or too little provisional tax throughout the year, you'll get a tax refund, or be asked to pay more tax.

Use-of-money interest (UOMI) applies when your provisional tax payments don't match what you actually owe:

• Underpaid provisional tax: You pay interest to IR
• Overpaid provisional tax: IR pays interest to you

And if you're late filing or paying you may be hit with penalties. Let IR know if you think you're going to be late to see if arrangements can be made.

How is provisional tax calculated?

Because you can't know your exact profit in advance, your provisional tax is generally based on the previous year's tax owed. So the amount of provisional tax will generally be based on the previous year's tax owed.

Four provisional tax calculation methods help match payments to your business situation:

• Standard option: Best if income stays similar or increases
• Estimate option: Ideal when you expect lower income
• Ratio option: Suits businesses with fluctuating or seasonal income
• Accounting Income Method (AIM): Perfect for irregular income or new businesses

Choose the right method: Consult your accountant as your business needs may change over time.

Standard option

The standard option is the default option if you don't choose another one. It's a good option to use if your profit is likely to remain about the same or increase in the coming year.

The standard option calculates your payments based on your previous year's residual income tax (RIT) plus 5%. Or, as Inland Revenue clarifies, if that return has not been filed, it is based on your RIT from 2 years ago plus 10%.

Estimate option

With the estimate option, you tell IR how much income tax you expect to pay. You can adjust your estimates as many times as you like right up until the final instalment is due, and adjust the payments accordingly.

The estimate option is recommended if you know, or expect, your income will decrease over the coming year. For instance, you might be taking time off to have a child or you know you won't have work from a particular client. It can help you avoid over- or under-paying.

So if your tax was $10,000 last year, but you think it'll only be $7000 in the current year, you divide your estimate by the required number of payments. If your estimate changes during the year, you adjust the payment amount.

You do need to watch your profit and make sure to adjust your estimates if you use this method. If you get it wrong you could end up with penalties or being charged interest once you've filed your return if you haven't paid enough provisional tax.

Ratio option

The ratio option allows your provisional tax to be calculated based on the income you declare in your GST returns. If your income tends to fluctuate a lot, or is seasonal, the ratio option may be best for you. But there are qualifying criteria, and if you qualify for this method you must let IR know that you want to use it before the start of your financial year.

Accounting Income Method (AIM)

The AIM method uses accounting software, like Xero, to calculate your provisional tax payments so that you only pay tax when you make a profit. If you don't make a profit you don't pay any tax that month.

You can use AIM if your yearly turnover is under $5 million. It's a good method to choose if your income is irregular or seasonal, if your business is new or growing, or if you can't give an accurate forecast of the income.

Unlike the other methods, if you use AIM you'll have to pay provisional tax in your first year of business. But you also avoid the year-two spike of paying last year's tax as well.

Because your adviser runs AIM through accounting software, it makes provisional tax easier to manage, matches payments with your cash flow, and reduces the risk of interest and penalties if you get it wrong. Any overpayments can be refunded straight away instead of waiting until the end of the financial year.

You can compare AIM with the other accounting methods on the IR website.

When is provisional tax due?

Registered for GST: If you're registered for GST, payment dates* are usually based on the frequency of filing your GST returns. You can learn more about GST in our guide.

• Standard and estimate options: Three instalments by 28 August, 15 January and 7 May. Or, if you file six-monthly GST returns, Inland Revenue confirms you will only pay 2 instalments, which are due by 28 October and 7 May.
• Ratio option: Six instalments by 28 June, 28 August, 28 October, 15 January, 28 February, and 7 May.
• AIM: Monthly instalments if you file your GST monthly, or every two months if you file your GST two or six monthly.

If you're not registered for GST, you'll make three instalments under the standard and estimate options (28 August, 15 January and 7 May) and six two-monthly instalments under the Accounting Income Method (AIM).

*When a tax payment due date falls on a weekend or public holiday, it's shifted to the next working day.

Sole trader vs company tax differences

Choosing a business structure affects how you pay tax. As a sole trader, your business isn't legally separate from you. You pay income tax at your personal rate on the business profits.

A company, on the other hand, is a separate legal entity. It pays income tax at the company tax rate, and you are paid a wage or salary from the company. Company structures have more complex compliance requirements, but also offer more legal protection.

Managing sole trader tax

Effective tax management prevents penalties, reduces interest charges, and improves cash flow.

Key management strategies:

• Use accounting software:Automates calculations and tracks deadlines
• Maintain accurate records: Ensures proper expense deductions and income reporting
• Get professional help:Bookkeepers and tax advisors prevent costly mistakes
• Monitor cash flow: Plan for tax payments to avoid funding shortfalls

Streamline your sole trader tax with Xero

Managing sole trader tax can be straightforward. With clear records and the right tools, you can stay on top of your obligations and focus on what you do best. Accounting software helps you track income, manage expenses, and see your financial position in real time, so tax time is more predictable.

See how you can run your business, not your books, and try Xero for free.

FAQs on sole trader tax

Here are some common questions sole traders have about tax.

How much tax will I pay as a sole trader?

As a sole trader, your business profit is added to any other personal income you have, and you're taxed on the total amount using New Zealand's individual income tax rates. The exact percentage depends on how much you earn in a financial year.

How do I pay my sole trader tax?

You pay tax after filing your annual IR3 tax return. If your tax to pay is over $5,000, you'll generally need to pay it in instalments throughout the year, which is known as provisional tax. If it's under $5,000, you can pay it in one lump sum.

Do I need a separate bank account as a sole trader?

While it's not a legal requirement, having a separate bank account for your business is highly recommended. It makes it much easier to track your business income and expenses, which simplifies your bookkeeping and tax return preparation.