Pay early for savings

Jeremy Tauri.

Sometimes, no matter how much money I tell a client they've made, the issue that rests on their minds immediately is the amount of tax they have to pay.

Fair enough. Their reward for a good year's work is a tax bill at the end of it. This is something that even veteran business owners will let out a slight groan at.

So then, I can imagine it might seem a bit nutty to be told you might want to consider paying some tax when you don't absolutely have to. But it can actually save you money.

Here are a couple of scenarios where paying your tax earlier is a good idea.

You may qualify for a tax discount of 6.7 per cent if you are a sole trader or partnership in your first year of business and pay before the end of your first tax year. Income from interest, dividends and rent is excluded.

So if you start business in June 2016 and you voluntarily pay the tax before March 31, 2017, then on a $5000 tax bill you can save $335. Companies and trusts are not eligible for this discount.

Another scenario is if you're a company that's growing wildly and expecting larger profits for the year and you're currently not in the provisional tax regime then you may want to make voluntary payments of tax before the year end.

This is because the IRD charge use of money interest to companies that have terminal tax over $2500 and at a rate of 8.27 per cent, so it pays to check this out with your accountant to see if it applies to you.

Or you're just tempted to spend your tax money so paying the taxman voluntarily may save you some money later. Interest and penalties on unpaid tax adds up.

Some people opt to pay themselves wages but this can mean less tax savings if you pay too much or too little.

From April 1, 2018 businesses with a turnover of under $5 million will be able to pay their tax as they go replacing the current provisional tax system. This should reduce payments made throughout the year.

- Jeremy Tauri is an associate at Plus Chartered Accountants