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Some taxpayers are subject to ‘use of money interest’ when they don’t pay their tax, pay late or underpay.

When do you have to pay use of money interest to Inland Revenue?

Taxpayers that must pay use of money interest are those who:

• have under-estimated their provisional tax
• have earned income which has either not been taxed, or has not had enough tax deducted from it, and the end of year residual tax works out at $60,000 or more
• pay their taxes late.

COVID-19 and other adverse events affecting provisional tax

Inland Revenue has discretion to write-off penalties and interest for businesses unable to pay taxes on time due to the impact of COVID-19 or certain other adverse natural events such as flooding, cyclones or earthquakes which affect their income. You should still file returns, and when you are in a position to do so, you should indicate when tax can be paid, or request instalment arrangements. You may be eligible for a UOMI write off. Contact us to see how this affects your business.

How is the actual amount of use of money interest calculated?

Use of money interest rates are set by Inland Revenue. They are set at a level intended to discourage taxpayers from using Inland Revenue like a bank.

From 9 May 2023 the rate at which you pay use of money interest is 10.39%.

Also, you may also face late payment penalties, an initial 1% on the tax paid late. And then if it’s not fully paid within a week, a further 4% is added. Use of money interest also continues to apply on top of these penalties. So, paying your tax late is an expensive option.

Minimising use of money interest

Regular tax planning is important for your business. Where you are likely to fall into the interest regime, it may be advisable to make voluntary payments of provisional tax as you go, as it is likely that you will find it cheaper to finance your tax payments through your trading bank or by using a tax pooling intermediary.

We recommend that you obtain a good software package – we love Xero – which produces reliable, regular management reports, so you can see your income unfolding as the year progresses. You may wish to take responsibility for completing these reports yourself, or you may wish us to do them for you, as many of our clients do.

Keep in mind

Make sure you have a broad idea of your likely tax commitments in advance. We can prepare a tax plan for you.

If your income circumstances change, let us know as there may be provisional tax (and interest) consequences.