Paying provisional tax can be tricky, with amounts changing from year to year and bigger payments sometimes coinciding with periods of low cash flow. It’s important to stay on top of it, otherwise if you underpay provisional tax, it’s likely you’ll be charged use of money interest (UOMI) by Inland Revenue — which then creates additional expenses and stress. Add to this potential late payment penalties from Inland Revenue and you really do find yourself in a painful position. So, how do you avoid this problem? Tax pooling could be the answer you’re looking for.
What is tax pooling?
Tax pooling is a progressive approach to provisional tax management that is designed to smooth out tax payments. A tax pool is a fund of money created by several taxpayers made up of provisional tax payments. It’s organised by a registered intermediary, which works with both taxpayers and the Inland Revenue Department (IRD). When you join a tax pool, you pay your provisional tax into the fund. You can set up your payments to help you manage your cash flow — for example, making a regular fixed monthly payment. Your tax is then paid out of this fund on your behalf. The funds are held in an Inland Revenue account, which transfers them against the name of the members of the tax pool as instructed by the intermediary. You can read more about how tax pooling works here. If you haven’t paid enough into the pool to cover your tax, the tax pool lends you the money at a cheaper rate than the IRD’s UOMI rate. If you have overpaid, the extra money is lent to other people in the tax pool and you earn interest.
Is tax pooling right for you?
The advantages of tax pooling are lower costs on late payments, earnings on overpayment, and generally making it easier to manage unpredictable provisional tax payments. Whether you’re a large company, a medium sized business or a sole trader, tax pooling can be a great solution to your provisional tax problems. If you’d like to know how tax pooling could work for you, get in touch with the Kendons team today.