Provisional tax explained for small business owners

Provisional tax is not a separate tax. It is a way of prepaying your annual income tax in instalments rather than as one lump sum at the end of the year. Every registered company is automatically a provisional taxpayer, and individuals who earn income outside a regular salary, such as freelancers, directors and sole proprietors, are usually provisional taxpayers too.

Most provisional taxpayers make two payments per tax year using the IRP6 return on SARS eFiling. The first payment is due six months into the financial year and is based on an estimate of taxable income for the full year. The second payment is due at financial year end and reconciles that estimate against actual performance. A optional third top-up payment can be made several months later to avoid interest if the first two estimates were too low.

Underestimating your taxable income on these returns carries real risk. If your estimate is significantly below your actual taxable income, SARS can impose a penalty calculated on the shortfall, in addition to interest on the late portion of tax. New business owners are often caught out in their first year because they have no prior assessment to base an estimate on, so it is worth budgeting conservatively rather than guessing low.

Keeping basic monthly management accounts makes provisional tax estimates far more accurate, since you can extrapolate actual year-to-date profit rather than guessing. If your trading pattern is seasonal, adjust your estimate accordingly rather than using a simple straight-line projection, since SARS compares your estimate to your actual result, not to an average business.