Paying provisional tax can be tricky, because the amounts change from year to year, and bigger payments sometimes coincide with periods of low cashflow. If you underpay your provisional tax, you will likely be charged use of money interest (UOMI) by Inland Revenue (IR).
Tax pooling is designed to help solve this problem and smooth out your tax payments.
What is tax pooling?
A tax pool is a fund of money created by many taxpayers paying in their provisional tax. It’s organised by a registered intermediary, which works with both taxpayers and the IRD.
When you join a tax pool, you pay your provisional tax into the fund. You can make a regular fixed monthly payment, for example, so it’s easier to manage your cashflow.
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 (7% however rising to above 10%-15% when you include late payment penalties). If you have overpaid, the extra money is lent to other people in the tax pool and you earn interest.
How can you find out whether tax pooling is right for you?
The advantages of tax pooling are lower costs on late payments, earnings on overpayment, and generally making it easier to manage provisional tax payments. You also have the ability to finance tax at low interest rates!
If you’d like to know more about tax pooling, and whether it could work for you, get in touch.
We use Tax Traders as they use the best software available to save you the most amount of money.
We can help by answering your questions.