If you run a company, or you earn income that isn't taxed at source, SARS collects your income tax in advance, twice a year, on an IRP6 return. Provisional tax is your normal income tax paid in instalments during the year. If you miss a date or your estimate is too low, SARS charges penalties and interest. This post explains how it works and where the penalties arise.

Who is a provisional taxpayer

Every company is a provisional taxpayer automatically. There is no threshold and no way to opt out, so if you trade through a Pty Ltd, the rules apply to you. An individual is a provisional taxpayer if they earn income other than a salary, such as rental income, sole-proprietor business profits, significant investment income or freelance fees. If all your income is salary with PAYE already deducted, you generally don't have to pay provisional tax. If you have any side income, check whether you have to register.

The two compulsory payment dates

Provisional tax has two compulsory payments a year, both filed on an IRP6:

  • End of August: the first payment, at least half of your estimated tax for the full year.
  • End of February: the second payment, which brings the total up to your full estimated liability for the year, less what you paid in August.

There's also an optional third payment at the end of September the following year. It is a voluntary top-up that settles a shortfall and stops further interest. The section on the September top-up below explains when to use it.

Provisional tax payments are separate from your annual return. They fall due twice a year whenever your ITR12 or ITR14 is due. An August payment is still due even if your annual return isn't due for months.

How to estimate and the safe-harbour rules

Each payment is based on your estimate of taxable income for the year. The August estimate carries little penalty risk. SARS tests the February estimate against your final taxable income. If that estimate is too low, SARS charges a 20% under-estimation penalty on the shortfall.

The penalty does not apply if your February estimate meets one of these safe-harbour tests:

  • Taxable income of R1 million or less: your February estimate is at least 90% of your actual final taxable income, OR at least equal to your 'basic amount' (broadly, the taxable income from your last assessment, escalated).
  • Taxable income above R1 million: the basic-amount test no longer applies. Your estimate must be at least 80% of your actual income to avoid the penalty.
20%
Under-estimation penalty on the shortfall if your second-payment estimate misses the safe harbour

Paying late is a separate offence. A payment made after the deadline attracts a 10% late-payment penalty plus interest, whatever the estimate. You can be penalised for paying too little and also for paying too late.

A February estimate that is too low

Your company has a strong year and ends up with R800,000 actual taxable income. Tax at roughly 27% is about R216,000. Because you're under R1m, the safe harbour is 90% of actual, i.e. R720,000, on which tax is about R194,400. In February you estimated R400,000 to keep cash in the bank, and paid about R108,000. That misses the safe harbour, so the 20% penalty is charged on the difference: 20% of (R194,400 − R108,000) ≈ R17,280, plus interest, on top of the tax you still owe. The penalty takes back the cash you held on to in February.

The September top-up payment

If you had a strong year and your February estimate was too low, the voluntary third payment at the end of September lets you pay the shortfall. Paying it on time stops interest on the underpayment. It does not reverse an under-estimation penalty in every case. It is most useful when your final numbers only became clear after February. If you owe tax, paying sooner costs less in interest.

How to file and pay

Filing the estimate and making the payment are two separate steps, and both have to happen by the deadline. You complete the IRP6 on eFiling, which calculates the tax on your estimated income. Then you pay, by SARS credit-push through your bank or by EFT using the payment reference SARS generates. If you file the IRP6 and don't pay, SARS still charges the late-payment penalty. The deadline is the date the funds must have cleared at SARS. A bank transfer made late on the last day may not clear in time.

Put each provisional deadline in your diary a week early. The deadlines fall at month-end, when payroll, supplier payments and, in some months, VAT are also due. A week gives you time to pull the numbers, file the IRP6 and let the payment clear.

Companies with little or no profit still have to file

A company that made little or no profit still has to file. Every company is a provisional taxpayer, so it must submit the IRP6 even if the estimated tax is nil. A nil or low return filed on time keeps the company compliant. If the company doesn't file, SARS charges an administrative penalty for the missing return, even though filing would have cost nothing.

Steps to stay compliant

  1. Keep your bookkeeping up to date so that your estimate is based on current figures.
  2. Put end-August and end-February in your diary now, and treat them as fixed dates like a payroll run.
  3. Make a realistic estimate that lands inside a safe harbour. The under-estimation penalty costs more than the cash you would hold on to by estimating low.
  4. Use the September top-up if a strong year means your February payment was too low.
  5. If cash is tight around a deadline, talk to us before the date. SARS offers payment arrangements, and fewer options are open once you're already late.

Provisional tax needs planning twice a year. We can prepare your estimates and file your IRP6 returns for you. Book a discovery call and we'll set up your deadlines and estimates so that you pay the right amount on time.